Describe the Difference Between Fixed and Floating Exchange Rates

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The Answer is Under a fixed rate system the value of a currency is fixed (usually in terms of U.S.dollars)and is only allowed to change under a specific set of circumstances.The value of a fixed rate system is that it introduces monetary discipline (on a country level),discourages currency speculation,reduces uncertainty (in regard to future currency movements),and,according to the proponents of fixed rates,has little or no effect on trade balance adjustments.In contrast,under a floating rate system,currencies are allowed to float freely (in practice,the majority of floating rate systems are either managed in some way by government intervention or are pegged to another currency).The benefits of a floating rate system is that it gives countries monetary policy autonomy and,according to the proponents,provides a way for countries to correct trade deficits (i.e.an exchange rate depreciation should correct a trade balance by making a country's exports cheaper and its imports more expensive).
There is no right or wrong answer to this question-we simply don't know which system is better.We do know that a fixed rate system modeled along the lines of the Bretton Woods system will not work.Conversely,advocates of a fixed rate system argue that speculation is a major disadvantage of floating rates.Perhaps a modified fixed rate system will produce the type of economic stability that will contribute to greater growth in international trade and investments.

Describe the Difference Between Fixed and Floating Exchange Rates

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Describe the Difference Between Fixed and Floating Exchange Rates

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