Question

Distinguish between Fixed Exchange Rate System and Flexible Exchange Rate System.

Hint:

A fixed exchange rate system provides stability but requires government intervention, whereas a flexible exchange rate system allows market-driven adjustments but may lead to volatility.

Answer 1

Fixed Exchange Rate System:
- In this system, the foreign exchange rate is fixed by the government.
- It helps maintain stability in the value of the domestic currency relative to foreign currencies.
Flexible Exchange Rate System:
- In this system, the foreign exchange rate is determined by the market forces of demand and supply.
- The exchange rate fluctuates based on changes in demand and supply in the foreign exchange market.