Determination Of Exchange Rates Under Fixed And Managed Systems
Economics notes
Determination Of Exchange Rates Under Fixed And Managed Systems
➡️ Under a fixed exchange rate system, the exchange rate between two currencies is set by the government or central bank and does not fluctuate with market forces. This system is used to maintain a stable currency value and promote international trade.
➡️ Under a managed exchange rate system, the government or central bank intervenes in the foreign exchange market to influence the exchange rate. This system is used to maintain a certain level of exchange rate stability and to achieve economic objectives such as controlling inflation or promoting exports.
➡️ Both fixed and managed exchange rate systems have their advantages and disadvantages. Fixed exchange rate systems provide stability and predictability, but can be difficult to maintain in the face of economic shocks. Managed exchange rate systems can be more flexible, but can also be subject to speculation and currency manipulation.
What is the difference between fixed and managed exchange rate systems?
In a fixed exchange rate system, the value of a currency is fixed to another currency or a commodity, and the central bank intervenes in the foreign exchange market to maintain the exchange rate. In a managed exchange rate system, the central bank intervenes in the foreign exchange market to influence the exchange rate, but the value of the currency is not fixed to another currency or a commodity.
How does a country determine the exchange rate under a fixed exchange rate system?
Under a fixed exchange rate system, the central bank of a country determines the exchange rate by buying or selling its currency in the foreign exchange market to maintain the fixed exchange rate. If the value of the currency is too high, the central bank sells its currency to decrease the value, and if the value is too low, the central bank buys its currency to increase the value.
What are the advantages and disadvantages of a managed exchange rate system?
The advantages of a managed exchange rate system are that it provides more flexibility than a fixed exchange rate system, allows the central bank to intervene in the foreign exchange market to stabilize the exchange rate, and can help to promote economic growth. The disadvantages are that it can lead to currency manipulation, can be difficult to implement effectively, and can create uncertainty for investors.