Question

In order to submit this assignment, you will use this webform to upload a document file (.doc) or (.docx) with your answers. If you need to make a graph you may use a drawing program or sketch by hand. Report your source in APA or MLA format. Be sure that your responses model clear economic reasoning and addresses each of the following:

What are the advantages and disadvantages of a fixed exchange rate? What are the advantages and disadvantages of a floating exchange rate? Under what conditions might it be a good idea for a country to adopt a gold standard? Go online to find a news article that describes an example of a country that has changed their system from fixed to floating or from floating to fixed. Write a paragraph to summarize your responses.

Answer 1

Floating exchange rate=it is efficient since only one price that's exchange rate needs to change to correct Bop disequilibrium. In the process it corrects bop disequilibrium smoothly and continuously. The result is stabilising speculation. Whatever fluctuations remain in exchange rate can be hedged at small cost. It clearly shows degree of comparative advantage or disadvantage. Further under it nation need not worry too much about policies for external balance and can use freely dmestic policies I. E monetary and fiscal. But it has some disadvantage also. It leds to wild day to day fluctuations of exchange rates. This raises uncertainty and is costly. This would interfere with degree of specialisation and flow of international trade and investment. According to economies.,who favour fixed exchange rate, because speculators are ready to purchase currency when it is appreciating and sell it when it is depreciating it leds to destabilising speculation. Further it does not impose price discipline on country.

Fixed exchange rate. It reduces wild day to day fluctuations of exchange rates since exchange rates are fixed. It thus leds to less uncertainty and specialisation in production etc. Further it is considered by its advocates that it leds to less destabilising speculation as they point to above mentioned drawback of felixible exchange rate in this regard. Further it is argued that it leds to price displine to control Bop disequilibrium. But under this system all prices need to change to control disequibrium. Given that wages are not flexible downwards the fixed exchange rate can led to serious disequilibrium. Further under policies are not free to achieve domestic goals

It might be good idea if there are wild fluctuations in exchange rates, there is enough gold for using it for transaction purposes, country is rich enough, and country wants to avoid destabilising speculation

Nigeria has moved from fixed to flexible exchange rate system

Lastly we can say that Economists agree that country should either opt for full fixed exchange rate system or fully floating exchange rate system. Intermediate systems are not better at all. E. G under fully fixed exchange rate system countries will not change ER and thus destabilising speculation is avoided