Question

There are two major exchange rate systems that a country can adopt: flexible and fixed. Historically we have had each of these in the U.S. Debate the advantages and disadvantages of each of these two systems. Which one do you think is superior?

Answer 1

Exchange rate means a rate which is used for exchanging or converting currency of another country.there are two type of exchange rate .1 fixed rate exchange system 2) flexible exchange rate system

Fixed exchange rate system - means the rate which is remain same and government set and maintain this rate system.This is maintained by government hence there will be no fluctuation.Impact of fixed rate system may be Devaluation or revaluation.There is stability in currency rate

While flexible exchange rate is the rates which is maintained by market forces.There will be fluctuation in price.this rate is fixed by demand and supply forces.there will be no control of central bank and government.

As per policy maker and central bank point of view fixed exchange rate is superior because government have full control on this price.there will be low speculation activities here.this reduce risk and cost.

Flexible rate is good as it would free central bank reserve requirement.

As per conclusion we can say that flexible exchange reserve system is superior because it reduce unnecessary load of maintaing reserve requirement of central bank.A country have more faith in flexible rate system.