Question

Most of the world has floating exchange rates, but the Euro Zone combined the currencies of 17 countries to in effect, create a fixed exchange rate between them. China has a fixed exchange rate with the US dollar, and undervalues its exchange rate by 17% - 19%, thus giving them an unfair advantage in international exchange. Should the world governments get together and set up a common rule for currency exchange? Discuss.

Answer 1

Yes, governments should come together and set up a common rule for the exchange rate. By this no country will get benefits from unfair international trade like china.

This can prevent the unfair international trade as at a fixed rate every country which trades with other country have fixed rates of exchange.

Also fixed exchange rate have some advantages too

. Providing greater certainty to importers and exporters which encourage more international trade and investments.

. It also helps the government to maintain inflation at low rate which also has some benefits for long term period.

But every thing has some disadvantages also so they are

. Currencies that had become under or overvalued cannot be adjusted.

. Also it does not let the interest rates grow which does not let the economy grow.

. As it is fixed exchange rate it is less flexible.