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Choose the correct statement(s) from given below?
- a)Fixed exchange rate is determined bythe government
- b)Flexible exchange rate is determined by market forces(demand and supply of foreign exchange)
- c)Both (a)and (b)
- d)None of the above
Correct answer is option 'C'. Can you explain this answer?
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Choose the correct statement(s) from given below?a)Fixed exchange rate...
There are majorly two types of exchange rate systems. Fixed exchange rate system is governed by the central bank while flexible exchange rate system by the market forces.
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Choose the correct statement(s) from given below?a)Fixed exchange rate...
Fixed vs. Flexible Exchange Rates
Fixed exchange rate is determined by the government, while flexible exchange rate is determined by market forces (demand and supply of foreign exchange). Let's delve deeper into these two concepts:
Fixed Exchange Rate
- In a fixed exchange rate system, the government or central bank sets the official exchange rate against other currencies.
- The government intervenes in the foreign exchange market to maintain the fixed rate by buying or selling its own currency.
- The advantage of a fixed exchange rate is stability and predictability for businesses and investors.
- However, maintaining a fixed rate can be challenging and requires significant foreign exchange reserves.
Flexible Exchange Rate
- In a flexible exchange rate system, the exchange rate is determined by market forces, specifically the demand and supply of currencies.
- The exchange rate fluctuates based on various factors such as inflation, interest rates, political stability, and economic performance.
- The advantage of a flexible exchange rate is that it can adjust to changing economic conditions and shocks.
- However, it can also lead to volatility and uncertainty in the foreign exchange market.
Conclusion
Both fixed and flexible exchange rate systems have their pros and cons. While fixed exchange rates provide stability, flexible exchange rates allow for adjustments to economic conditions. Ultimately, the choice between the two depends on the goals and priorities of the country's monetary policy.
Fixed exchange rate is determined by the government, while flexible exchange rate is determined by market forces (demand and supply of foreign exchange). Let's delve deeper into these two concepts:
Fixed Exchange Rate
- In a fixed exchange rate system, the government or central bank sets the official exchange rate against other currencies.
- The government intervenes in the foreign exchange market to maintain the fixed rate by buying or selling its own currency.
- The advantage of a fixed exchange rate is stability and predictability for businesses and investors.
- However, maintaining a fixed rate can be challenging and requires significant foreign exchange reserves.
Flexible Exchange Rate
- In a flexible exchange rate system, the exchange rate is determined by market forces, specifically the demand and supply of currencies.
- The exchange rate fluctuates based on various factors such as inflation, interest rates, political stability, and economic performance.
- The advantage of a flexible exchange rate is that it can adjust to changing economic conditions and shocks.
- However, it can also lead to volatility and uncertainty in the foreign exchange market.
Conclusion
Both fixed and flexible exchange rate systems have their pros and cons. While fixed exchange rates provide stability, flexible exchange rates allow for adjustments to economic conditions. Ultimately, the choice between the two depends on the goals and priorities of the country's monetary policy.
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Choose the correct statement(s) from given below?a)Fixed exchange rate is determined bythe governmentb)Flexible exchange rate is determined by market forces(demand and supply of foreign exchange)c)Both (a)and (b)d)None of the aboveCorrect answer is option 'C'. Can you explain this answer?
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