Question:
Distinguish between Fixed Exchange Rate System and Flexible Exchange Rate System.
Distinguish between Fixed Exchange Rate System and Flexible Exchange Rate System.
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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.
Updated On: Feb 19, 2025
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Solution and Explanation
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.
- 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.
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