Question

Formulate an argument for why a country should select a flexible exchange rate. Be sure to justify your position.

Answer 1

Exchange rate represents the price of one country currency for another. Fixed Exchange Rate is a type of system where the exchange rate is fixed by the government. In order to do so, the government should have huge foreign currencies in its reserve. So fixed exchange rate should be selected by the Kingdom of Netherlands. Producers and consumers can plan correctly only when the exchange rate is fixed. The government can take necessary actions so that the deficit won't happen in the balance of payment.. It can maintain the exchange rate by buying and selling currencies. Netherland is a rich and open economy. It depends heavily on foreign trade. It's the leading European nation in attracting foreign direct investment and one of the top investors in the US. It is one among 12 countries which brought Euro as a common currency. It was formed not to have different exchange rates. government type is also a constitutional monarchy. So more power won't be given to market forces.