Question

What are the general conditions under which a fixed exchange rate makes sense for a country? Finally evaluate the pros and Cons of using Pegged currency in UAE.

Answer 1

Fixed exchange rate regime is also called as pegged exchange rate regime ,currency is Pegged under a narrow band y monetary authority of any country to avoid fluctuations in currency exchange rate and make stability in the market of it currency.

Pro: it is good as it avoid big fluctuations in the exchange rate if currency and good for benefitting from international trade . China also pegged it's currency compare to dollar and through which it always undervalued it's currency. Thus their import are become expensive and export become beneficial as it promo more and more export of products.

Cons: but this regime reduce the credibility of any currency as it is a unfair practice of currency manipulation and thus investor loss their confidence in such currency and there country as a destination of investment. As fixed exchange rate by china reduce competition with its neighborhood country as their products get unfair advantage of beneficial export and this international relations may be get bitter.