Question

Evaluate TWO advantages of managed exchange rates (5marks) and TWO advantages of fixed exchange rates (5marks)

Answer 1

Answer.

Two advantages of managed floating exchange rates are :-

(i). The first and main economic advantage of managed exchange rate is they leave the decision on monetory and fiscal authorities to fulfill their internal goals such as- employment , price stability and growth

(ii). Managed Floating exchange rate should mean there is hardly any need of maintaining higher reserves. So those extra reserve can be used to import capital goods and other items to promote economic growth relatively faster.

Two advantages of fixed exchange rate are:-

(i). It provides currency stability in the economy which makes country's business attractive to FDI ( Foreign direct investment ) Which will help in faster growth of economy.

(ii). Problem of inflation can be fixed in fixed exchange rate system as if a country fixes it's currency with the other popular currency like US Dollars then, strength of the company's currency will increase with increase in the strength of other currency.

Thank you.