Question

Briefly discussed the central issues in the fixed-flexible rate debate in the following
aspects
a.
Provide a greater discipline to the policymakers
b.
Greater growth in international trade a d investment

Answer 1

Fixed & Floating Exchange rates-Issues
a) Fixed exchange rate limits the ability of the policymakers to attain domestic stabilization through their engagement. Since the exchange rate is fixed, monetary policies are ineffective in the domestic market to stabilize the money and the economy. The impact of the policy makers are less in a market of fixed exchange rate than that of a floating one. Only fiscal policies will be effective in an economy with fixed exchange rate. The policymakers have higher importance in a floating exchange rate market since the policies can affect the stability and the performance of the domestic currency and the market in international trade. Both fiscal and monetary policies are effective in a floating exchange market.
b) Fixed exchange rate helps the importers and exporters to be certain about the economy and take actions which have expected outputs. This can encourage international trade and investment taking advantage of the certainty of the economy. The minimum inflation and low interest rates will attract investments and encourage the trade with stable performance of the economy and of the currency. Floating exchange rates have a cost on the trade that is uncertain about the exchange rate and thus affecting the investment and growth of international trade. Sudden change in exchange rate can change the level of investment and international trade. Exports and imports can be fluctuated in an economy following floating exchange rates. Chances of inflation and the interference of monetary authority will affect the value of the currency affecting international trade and investment.