Question

In: Finance

“For a fixed exchange rate system to work successfully, the government that oversees its operations must...

“For a fixed exchange rate system to work successfully, the government that oversees its operations must be able to make tight budget and monetary policies prevail”. Agree or disagree and justify your position

Solutions

Expert Solution

Yes the given statement is true because for fixed exchange rate system to be successful, government that overseas its operations must be able to make tight budget and monetary policies prevail this is because the government of the country wants to keep its currency within a narrow range.

Fixed currency rate system is aimed at pegging domestic currency against foreign currency so that it could be protected against the volatile moment and its value doesn't diminish much in adverse situations.

Central Bank always intervene through various direct and indirect intervention methods to keep the currency value at the fixed amount in relation to that of foreign currency. The primary objective of such type of fixed currency regime is to keep the currency in a narrow band so that the export and import are not hampered much and there is very low level of translation risks .

Government that overseas its operations must be able to make very tight policy so that the intention of keeping domestic currency in a fixed band is achieved.

It helps the government in maintaining the low rate of inflation as well as providing the exporters with high degree of certainty in their realisations without much fall in their value in relation with foreign currency exchange risk. It is a highly stable method but it needs continuous intervention by central banks so that domestic currency does not breach required narrow band.


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