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In: Economics

Changes in the value of a nation’s currency affect the nation’s net exports, and thus GDP....

Changes in the value of a nation’s currency affect the nation’s net exports, and thus GDP. How might this make a large country, like the US, more willingly to adopt a flexible exchange rate regime than a small country, like Belgium.

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Expert Solution

GIVEN THAT:

FREE FLOATING EXCHANGE RATE:

Refers to the exchange rate where market runs according to demand and supply of currency and government don't intervene.

WHY US HAS MORE WILL TO ADOPT FLEXIBLE EXCHANGE RATE AND WHY SMALLER COUNTRY RESIST...

1.It enables the exchange rates to automatically adjust according to market needs, demands and supply.

2. It cushions the impact of large swings in demand and supply.

3. It insulates the economy from the negative impact of international events .

HOWEVER SMALL COUNTRY ARE APPREHENSIVE REGARDING FREE FLOATING BECAUSE:

1. Floating Exchange Rate are unpredictable and unstable.

2. It increases foreign exchange volatility

3. Business investment and planning are risky as one is not certain about future exchange rates.

4. Extreme appreciation and depreciation of currency calls for government intervention thus, managed floating is adopted .

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Rahul Sunny answered 3 months ago
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