Changes In The Exchange Rate Under Different Exchange Rate Systems
Economics notes
Changes In The Exchange Rate Under Different Exchange Rate Systems
➡️ Floating exchange rate system: In this system, the exchange rate is determined by the market forces of demand and supply. It is not fixed and can fluctuate due to changes in the economic conditions of the countries involved.
➡️ Fixed exchange rate system: In this system, the exchange rate is fixed by the government and is not allowed to fluctuate. This system is used to maintain stability in the exchange rate and to protect the domestic economy from external shocks.
➡️ Managed exchange rate system: In this system, the exchange rate is managed by the government and is allowed to fluctuate within a certain range. This system is used to maintain stability in the exchange rate and to protect the domestic economy from external shocks.
How does the exchange rate change under a fixed exchange rate system?
Under a fixed exchange rate system, the exchange rate is set by the government and does not fluctuate. This means that the exchange rate remains the same regardless of market forces.
How does the exchange rate change under a floating exchange rate system?
Under a floating exchange rate system, the exchange rate is determined by the market forces of supply and demand. This means that the exchange rate can fluctuate depending on the demand for a particular currency.
How does the exchange rate change under a managed exchange rate system?
Under a managed exchange rate system, the exchange rate is set by the government but is allowed to fluctuate within a certain range. This means that the exchange rate can move up or down depending on market forces, but the government can intervene to keep the exchange rate within a certain range.