Question

a) Explain the relative merits of fixed and floating exchange rate regimes.

b) From the perspective of in international business, what are the most important criteria in a choice between the systems?

c) Which system is the more desirable for an international business?

Answer 1

Solution

a)

Merits of Fixed exchanged rate regimes are ;

(1) It ensures stability in the exchange rate. Due to certainty, it promotes foreign trade.

(2) It promotes capital movements

(3) It prevents capital outflow

(4) It helps the government to check inflation and stops speculation in the foreign exchange market

Merits of the floating exchange rate are ;

(1) It eliminates the problem of undervaluation or overvaluation of the currency

(2) It promotes venture capital in the form of foreign exchange

(3) Under this system, there is no need to hold any reserves

(4) It enhances efficiency in resource allocation

b)

From the perspective of the international business, the most important criteria in a choice between the systems are ;

(1) Volatility and risk

(2) Inflationary consequences

(3) Monetary autonomy.

c)

The Floating exchange rate regimes system is more desirable for international business.