Question

Explain using economic theory why or why not China’s use of a fixed exchange rate system will be a good/bad exchange rate regime policy. Based on your answer compare and/or contrast with the German economy. Why should the German economy or why shouldn’t the German economy pursue a fixed exchange rate regime?

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Answer 1

China does not use fixed exchange rate policy because fixed exchange rate policy is limiting the growth of the economy and it is leading to stopage of the inflow of the money into the economy as we have seen in past instances where as fixed exchange rate system are also treated as currency manipulators because they try to fix the free flow of money from one currency to another and they are trying to fix the exchange rate to certain extent which are not practical in nature because In this world,there is a free demand and supply of commodities there is a high deregulation and there should be proper promotion of floating interest rate regime and hence it would be causing loss to the Chinese economy due to lack of flow of of funds if they implement with fixed exchange rate policy.

German economy should not pursue a fixed exchange rate regime because it will lead to stoppage of funds from one economy to another and it will be leading to exploitation of the free trade policy and it will also lead to economy and exchange between completely disproportionate in relationship with each other because the government will be trying to regulate the exchange rate which is not practical in today's world in Germany so it will lead to a loss of business reputation and loss of fund inflows.