All Courses
Explore Courses UPSC Exam UPSC Test Series Free Notes EduRev Infinity Get the App Login Join for Free
Sign in Open App
Humanities/Arts Exam  >  Humanities/Arts Questions  >  Merits and demerits of fixed exchange rate.? Start Learning for Free
Merits and demerits of fixed exchange rate.?
Clear all your Humanities/Arts doubts with EduRev
Most Upvoted Answer
Merits and demerits of fixed exchange rate.?
Merits of Fixed Exchange Rate
- Stability: A fixed exchange rate provides a stable environment for international trade and investment. Businesses can plan better without worrying about currency fluctuations.
- Inflation Control: By tying the currency to a stable foreign currency, countries can import credibility and stability, helping to control inflation.
- Predictability: Fixed rates allow for predictable pricing in foreign transactions, which can enhance economic planning and budgeting for both businesses and governments.
- Reduced Speculation: With a fixed exchange rate, there is less opportunity for speculative attacks on the currency, which can promote economic stability.
- Encouragement of Foreign Investment: Stability in exchange rates can attract foreign investors who may be deterred by volatility in floating exchange rate systems.
Demerits of Fixed Exchange Rate
- Loss of Monetary Policy Autonomy: Countries may lose control over their monetary policy as they must maintain the fixed rate. This can limit the ability to respond to economic changes.
- Risk of Currency Crises: If a country cannot maintain its fixed exchange rate due to economic imbalances, it may face a sudden devaluation, leading to a loss of investor confidence.
- Adjustment Difficulties: Fixed rates can lead to misalignment with market fundamentals, requiring painful adjustments later, such as austerity measures or significant economic reforms.
- Resource Drain: Maintaining a fixed exchange rate may require large reserves of foreign currency, which can strain a country’s financial resources.
- Vulnerability to External Shocks: Countries with fixed exchange rates may be more susceptible to external economic shocks that can disrupt their economy.
By understanding these merits and demerits, policymakers can make informed decisions about adopting or maintaining a fixed exchange rate system.
Community Answer
Merits and demerits of fixed exchange rate.?
The merits and demerits of fixed exchange rate system
The main aspect of the fixed exchange rate system is that there must be reliability that the government will be able to perpetuate and maintain the exchange rate at the degree of level mentioned. Often, if there is a deficit in the Balance of Payment, in a fixed exchange rate system, governments will have to interfere to take care of the gap by the use of its official reserves. If people are aware that the amount of reserves is insufficient, they would begin to be skeptical about the capability of the government to maintain the fixed rate. This may increase the hypothesis of devaluation. When this reliance interprets into aggressive purchasing of one currency hereby forcing the government to devalue, it is known to compose a notional attack on a currency. Fixed exchange rates are liable to such types of attacks, as has been observed in the time period before the subside of the Bretton Woods System.
Explore Courses for Humanities/Arts exam

Similar Humanities/Arts Doubts

Directions: Read the passage carefully and answer the questions.The causes of the Asian Financial Crisis are complicated and disputable. A major cause is considered to be the collapse of the hot money bubble. During the late 1980s and early 1990s, many Southeast Asian Countries, including Thailand, Singapore, Malaysia, Indonesia, and South Korea, achieved massive economic growth of an 8% to 12% increase in their Gross Domestic Product (GDP). The achievement was known as the "Asian Economic Miracle". However, a significant risk was embedded in the achievement.The economic development in the Countries mentioned above were mainly boosted by export growth and foreign investment. Therefore, high-interest rates and fixed currency exchange rates (pegged to the U.S. dollar) were implemented to attract hot money. Also, the exchange rate was pegged at a rate favorable to exporters. However, both the capital market and corporates were left exposed to foreign exchange risk due to the fixed currency exchange rate policy.In the mid-1900s, following the recovery of the U.S. from a recession, the Federal Reserve raised the interest rate against inflation. The higher interest rate attracted hot money to flow into the U.S. market leading to an appreciation of the U.S. dollar.The currencies pegged to the U.S. dollar also appreciated, and thus hurt export growth with a shock in both export and foreign investment, asset prices, which were leveraged by large amounts of credits, began to collapse. The panicked foreign investors began to withdraw. This translated into increased demand for US dollars. Further, there was no perceptible increase in the supply of dollars as wary investors shied away from investing in these economies. With demand being greater than supply, the US dollar appreciated with the domestic currency depreciating. The depreciation of the local currencies fuelled more investments being pulled out of these economies thus resulting in a crisis.Thus Thai Government first ran out of foreign currency to supports its exchange rate, forcing it to float the baht.The value of the baht thus collapsed immediately afterward. The same also happened to the rest of the Asian Countries soon after.Q. Identify the most unlikely reason or appreciation of the US dollar.

Directions: Read the passage carefully and answer the questions.The causes of the Asian Financial Crisis are complicated and disputable. A major cause is considered to be the collapse of the hot money bubble. During the late 1980s and early 1990s, many Southeast Asian Countries, including Thailand, Singapore, Malaysia, Indonesia, and South Korea, achieved massive economic growth of an 8% to 12% increase in their Gross Domestic Product (GDP). The achievement was known as the "Asian Economic Miracle". However, a significant risk was embedded in the achievement.The economic development in the Countries mentioned above were mainly boosted by export growth and foreign investment. Therefore, high-interest rates and fixed currency exchange rates (pegged to the U.S. dollar) were implemented to attract hot money. Also, the exchange rate was pegged at a rate favorable to exporters. However, both the capital market and corporates were left exposed to foreign exchange risk due to the fixed currency exchange rate policy.In the mid-1900s, following the recovery of the U.S. from a recession, the Federal Reserve raised the interest rate against inflation. The higher interest rate attracted hot money to flow into the U.S. market leading to an appreciation of the U.S. dollar.The currencies pegged to the U.S. dollar also appreciated, and thus hurt export growth with a shock in both export and foreign investment, asset prices, which were leveraged by large amounts of credits, began to collapse. The panicked foreign investors began to withdraw. This translated into increased demand for US dollars. Further, there was no perceptible increase in the supply of dollars as wary investors shied away from investing in these economies. With demand being greater than supply, the US dollar appreciated with the domestic currency depreciating. The depreciation of the local currencies fuelled more investments being pulled out of these economies thus resulting in a crisis.Thus Thai Government first ran out of foreign currency to supports its exchange rate, forcing it to float the baht.The value of the baht thus collapsed immediately afterward. The same also happened to the rest of the Asian Countries soon after.Q. The likely impact of an appreciation of the US dollar, on imports of the South East Asian Countries from the U.S. would be

Directions: Read the passage carefully and answer the questions.The causes of the Asian Financial Crisis are complicated and disputable. A major cause is considered to be the collapse of the hot money bubble. During the late 1980s and early 1990s, many Southeast Asian Countries, including Thailand, Singapore, Malaysia, Indonesia, and South Korea, achieved massive economic growth of an 8% to 12% increase in their Gross Domestic Product (GDP). The achievement was known as the "Asian Economic Miracle". However, a significant risk was embedded in the achievement.The economic development in the Countries mentioned above were mainly boosted by export growth and foreign investment. Therefore, high-interest rates and fixed currency exchange rates (pegged to the U.S. dollar) were implemented to attract hot money. Also, the exchange rate was pegged at a rate favorable to exporters. However, both the capital market and corporates were left exposed to foreign exchange risk due to the fixed currency exchange rate policy.In the mid-1900s, following the recovery of the U.S. from a recession, the Federal Reserve raised the interest rate against inflation. The higher interest rate attracted hot money to flow into the U.S. market leading to an appreciation of the U.S. dollar.The currencies pegged to the U.S. dollar also appreciated, and thus hurt export growth with a shock in both export and foreign investment, asset prices, which were leveraged by large amounts of credits, began to collapse. The panicked foreign investors began to withdraw. This translated into increased demand for US dollars. Further, there was no perceptible increase in the supply of dollars as wary investors shied away from investing in these economies. With demand being greater than supply, the US dollar appreciated with the domestic currency depreciating. The depreciation of the local currencies fuelled more investments being pulled out of these economies thus resulting in a crisis.Thus Thai Government first ran out of foreign currency to supports its exchange rate, forcing it to float the baht.The value of the baht thus collapsed immediately afterward. The same also happened to the rest of the Asian Countries soon after.Q. The likely im pact of a depreciation of the dom estic currencies of the South East Asian Countries on exports to the US would be

Directions: Read the passage carefully and answer the questions.The causes of the Asian Financial Crisis are complicated and disputable. A major cause is considered to be the collapse of the hot money bubble. During the late 1980s and early 1990s, many Southeast Asian Countries, including Thailand, Singapore, Malaysia, Indonesia, and South Korea, achieved massive economic growth of an 8% to 12% increase in their Gross Domestic Product (GDP). The achievement was known as the "Asian Economic Miracle". However, a significant risk was embedded in the achievement.The economic development in the Countries mentioned above were mainly boosted by export growth and foreign investment. Therefore, high-interest rates and fixed currency exchange rates (pegged to the U.S. dollar) were implemented to attract hot money. Also, the exchange rate was pegged at a rate favorable to exporters. However, both the capital market and corporates were left exposed to foreign exchange risk due to the fixed currency exchange rate policy.In the mid-1900s, following the recovery of the U.S. from a recession, the Federal Reserve raised the interest rate against inflation. The higher interest rate attracted hot money to flow into the U.S. market leading to an appreciation of the U.S. dollar.The currencies pegged to the U.S. dollar also appreciated, and thus hurt export growth with a shock in both export and foreign investment, asset prices, which were leveraged by large amounts of credits, began to collapse. The panicked foreign investors began to withdraw. This translated into increased demand for US dollars. Further, there was no perceptible increase in the supply of dollars as wary investors shied away from investing in these economies. With demand being greater than supply, the US dollar appreciated with the domestic currency depreciating. The depreciation of the local currencies fuelled more investments being pulled out of these economies thus resulting in a crisis.Thus Thai Government first ran out of foreign currency to supports its exchange rate, forcing it to float the baht.The value of the baht thus collapsed immediately afterward. The same also happened to the rest of the Asian Countries soon after.Q. The likely impact on the Balance of payment position of Countries facing a financial crisis would be

Top Courses for Humanities/ArtsView all

Top Courses for Humanities/Arts

Merits and demerits of fixed exchange rate.?
Question Description
Merits and demerits of fixed exchange rate.? for Humanities/Arts 2025 is part of Humanities/Arts preparation. The Question and answers have been prepared according to the Humanities/Arts exam syllabus. Information about Merits and demerits of fixed exchange rate.? covers all topics & solutions for Humanities/Arts 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Merits and demerits of fixed exchange rate.?.
Solutions for Merits and demerits of fixed exchange rate.? in English & in Hindi are available as part of our courses for Humanities/Arts. Download more important topics, notes, lectures and mock test series for Humanities/Arts Exam by signing up for free.
Here you can find the meaning of Merits and demerits of fixed exchange rate.? defined & explained in the simplest way possible. Besides giving the explanation of Merits and demerits of fixed exchange rate.?, a detailed solution for Merits and demerits of fixed exchange rate.? has been provided alongside types of Merits and demerits of fixed exchange rate.? theory, EduRev gives you an ample number of questions to practice Merits and demerits of fixed exchange rate.? tests, examples and also practice Humanities/Arts tests.
Explore Courses for Humanities/Arts exam

Top Courses for Humanities/Arts

Explore Courses
SaveJoin the Discussion on the App for FREE
Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
10M+ students study on EduRev
Get App
© EduRev
Education Revolution
Signup to see your scores go up within 7 days!
Access 1000+ FREE Docs, Videos and Tests
Takes less than 10 seconds to signup