Question

“Policymakers are in favor of using the flexible exchange rate system compare with the fixed exchange rate system to attain both the internal balance and external balance of the economy.” Explain.

Answer 1

Flexible exchange rate systems are decided by the market. In fixed conversion standard systems, the national bank is committed to utilizing money related approach to keep up the swapping scale at a foreordained cost.

Policy makers use Flexible exchange rate systems as under this system the government can embrace autonomous money related approach. As such, under this arrangement of conversion scale, inward parity could be kept up by the administration. It is additionally contended that, as it is a self-changing instrument to reestablish BOP balance, a legislature can invest more energy in handling inner issues of expansion, un­employment, and so on.

The primary financial favorable circumstances of Flexible exchange rate systems are that they leave the money related and monetary specialists allowed to seek after inside objectives, for example, full business, stable development, and value solidness—and conversion scale alteration frequently fills in as a programmed stabilizer to advance those objectives. In the event that a nation encounters novel financial stuns and is monetarily free of its neighbors, a drifting conversion scale can be an important method to advance macroeconomic strength. A political favorable position of a cash board or money association in a nation with a degenerate past is that it "ties the hands" of the financial and monetary specialists, making it harder to back spending shortfalls by printing cash.

In Flexible exchange rate systems, the local economy remains protected from outer stuns and weights. Under this framework, the danger of 'bringing in expansion' from outside the nation is least. At the end of the day, value input impact is indistinct.