Floating exchange rates have the following advantages: Automatic Stabilisation: Any disequilibrium in the balance of payments would be automatically corrected by a change in the exchange rate. If BOP deficit arises, there would be an excess supply of home currency leading to a fall in exchange rate simply by the market . Fixed exchange rated can usefully commit the central bank to low and stable inflation. Definition. In a system of flexible exchange rates, the liquidity preference is high because the businessmen will like to enjoy wind fall gains from the fluctuating exchange rates. Managed floating exchange rates allow monetary policy independence. Instruments of Quantitative Credit Control (5 Marks) Nmims June 2022 Customized Assignments - Is the fixed or flexible exchange rate more advantageous for an economy Discuss the advantages and disadvantages of fixed exchange rate. Flexible Exchange Rate Regime. On the other hand, when a currency is in short supply or in high demand, the . 2. 3.2.2--Advantages and disadvantages of fixed exchange rate system. A freely (clean) floating (or flexible) exchange rate regime, where the monetary authorities refuse any intervention in the exchange rate market, is the simplest type of system. Export Price to two alternatives: pegging the exchange rate and pegging the CPI. Promotes International Trade: Fixed or stable exchange rates ensure certainty about the foreign payments and inspire confidence among the importers and exporters. The monetary policy of a country is not limited or affected by the economic conditions of other countries. Fixed exchange rate system attracts foreign capital because a stable currency does not involve any uncertainties about exchange rate that may cause capital loss. Flexible exchange rate regimes were rare before the late twentieth century. Dance Ballet For Dummies Cheat Sheet. Automatic Adjustment in BOP: The chief merit of the flexible exchange rate is that the BOP disequili­brium gets corrected automatically with the change in exchange rate. Instruments of Quantitative Credit Control (5 Marks) NMIMS June 2022 MBA Solutions - Is the fixed or flexible exchange rate more advantageous for an economy Discuss the advantages and disadvantages of fixed exchange rate. Fixed exchange rate and flexible exchange rate are two exchange rate systems, differ in the sense that when the exchange rate of the country is attached to the another currency or gold prices, is called fixed exchange rate, whereas if it depends on the supply and demand of money in the market is called flexible exchange rate. Market efficiency enhances. On the basis of information given below, calculate National Income (5 Marks) Items. The foreign exchange market is busy at all times by changes in the exchange rate. 2. Flexible exchange rates allow for an independent monetary policy, which can sometimes be managed wisely to avoid depressed output and high unemployment. The exchange rate system (also known as the exchange rate regime) is the way in which an exchange rate, i.e. This helps to promote international trade. The high level of demand of currency leads to force up its value means exchange rate. They can fluctuate wildly, while in the case of flexible exchange rates countries adopt a monetary system that determines base rates according to supply and demand. The currency of a country won't be affected should there be any economic movement in other nations. A floating exchange rate is based on market forces. If the speculators can guess that such BOP deficit will persist in the days ahead and the authority may go for a cut in foreign exchange rate then these people will be more enthu­siastic to sell domestic currencies in the foreign . . 2. Exports weaken and imports strengthen. Flexible exchange rates are helpful to do away with barrier to trade and capital movements. As the rate of GBP is € 4.50 in 1920. 3. Discuss the advantages and disadvantages of fixed exchange rate? NMIMS June 2022 MBA Solutions - Is the fixed or flexible exchange rate more advantageous for an economy . It also helps the smaller countries to avoid devaluation. The following entry analyzes each type of exchange rate regime, highlighting advantages and disadvantages. If the value of the exchange rate is high, then the price of finished imported goods will be relatively low. These twin pressures worsen the balance of payment positions as the economy becomes less competitive . A fixed exchange rate helps to ensure the smooth flow of money from one country to another. In your answer, consider the ramifications for fiscal and monetary policy. Advantages and disadvantages of fixed and flexible exchange rates Making decisions about exchange rate regime options involves many arguments and counterarguments for application of fixed or flexible exchange rate ar-rangements (Poirson, 2001; Frenkel, 2003; Bergsten, 1999, Haggart, 1999; Sachs and Larrain, 1999; Kenen, 2000; Domac at al., 2001). If you are in doubt as to the suitability of any foreign exchange 1000. Disadvantages of floating exchange rates. When there is a deficit in the balance of payments, a country's external value of the currency falls this encourages its exports and discourages its imports which ultimately brings about the . The advantages of this are that the float attempts to combine both the fixed and flexible exchange rate systems, depending on the instability. Instruments of Quantitative Credit Control (5 Marks) NMIMS June 2022 MBA Solutions - Is the fixed or flexible exchange rate more advantageous for an economy Discuss the advantages and disadvantages of fixed exchange rate. 4. . • Small variations in interest rates today can lead to large fluctuations in exchange rates. Firms will increase their use of foreign exchange derivatives to hedge against the negative effects of currency risk directly related to their operations (Menon, S., & Viswanathan Prior to World War II, governments used to purchase and sell foreign and domestic currency in order to maintain a desirable exchange rate, especially in accordance with each country's trade policy. Advantages of Fixed Exchange Rates. The basic disadvantage is that you do not control the value of your currency. For example, in the below-mentioned diagram, when there is an increase in the pound's demand, the pound to dollar increases from 1 Pound = Dollar 1.45 to 1 . Floating (flexible) exchange rate. Instability - floating exchange rates can be prone to large fluctuations in value and this can cause uncertainty for firms. It also makes the country's import competing sector less competitive. 4. How the pure floating exchange rate works. Advocates of flexible exchange rates disagree. Devaluation Devaluation is a downward adjustment to the country's value of money relative to a foreign currency or . It automatically deals with the balance of payments problem. If a currency is widely available on the market - or there isn't much demand for it - its value will decrease. 2. From the five basic positions — from which all ballet moves emanate — to the (mostly French) language of ballet, there's lots to master. This helps to promote international trade. The Gold Standard is a monetary system, mostly used during the period approximately from 1875 to 1914, in which the standard economic unit of account is based on a fixed quantity of gold. It is claimed that in the case of flexible rate of exchange, the authorities are not obliged to locate and enforce any "appropriate" or "optimum" rate. Factors affecting floating exchange rate. On the other hand, the flexible exchange rate is fixed by demand and supply forces. As such, it abstracts and simplifies from many economic issues that may bear directly on real policymaking. The exchange rate that variates with the variation in market forces is called flexible exchange rate. 1. . In a fixed exchange rate, it is difficult to respond to temporary shocks. Disadvantages of floating exchange rates Instability . NMIMS June 2022 MBA Solutions - Is the fixed or flexible exchange rate more advantageous for an economy . When supply and demand moves freely, the domestic economy is protected from fluctuations in the world economy. Flex­ible exchange rate encourages wide specula­tion since foreign exchange prices are not known in advance as in fixed exchange rate. Accordingly, what are the advantages of a floating exchange rate? Several central banks implement this policy, including in Indonesia. The disadvantage is that this creates uncertainty for importers and exporters when it comes to planning for future trades. Explain how the flexible exchange rate may be used to correct disequilibrium within an economy. (10 Marks) 3.a. Fixed rate is determined by the central government. Fixed exchange rate and flexible exchange rate are two exchange rate systems, differ in the sense that when the exchange rate of the country is attached to the another currency or gold prices, is called fixed exchange rate, whereas if it depends on the supply and demand of money in the market is called flexible exchange rate. It uses scarce resources to predict exchange rates. Example: The main arguments advanced in favor of the system of fixed or stable exchange rates are as follows: 1. Note, however, that buyers and sellers of currencies can "hedge" against . . . Pure floating exchange rates contrast with fixed exchange rates. Floating (flexible) exchange rate. Since the exchange rates stay on the equivalent level, the importers and exporters can plan their policy without begin afraid of depreciation or appreciation of the currency. Flexible exchange rates • Exchange rate today determined by expected path of domestic and foreign nominal interest rates and expected future exchange rate. It goes up or down according to the laws of supply and demand. . Instruments of Quantitative Credit Control (5 Marks) Nmims June 2022 Customized Assignments - Is the fixed or flexible exchange rate more advantageous for an economy Discuss the advantages and disadvantages of fixed exchange rate. diversified economies do not need a flexible exchange rate to cushion themselves from shocks. This is a major advantage of this system since holding foreign exchange for trading purposes is an expensive strategy. Flexible Exchange Rate Advantages. A floating exchange rate is the relative value of one currency concerning another country's currency, driven by the speculation and supply and demand forces prevailing in the market. Explain which . Rent. On the other hand, when a currency is in short supply or in high demand, the . When the supply and demand of currency is equal, it is called as equilibrium exchange rate. In a flexible exchange rate system, the value of the currency is allowed to fluctuate freely as per the changes in the demand and supply of the foreign exchange. Automatic Stabilisation: Any disequilibrium in the balance of pay­ments would be automatically corrected by a change in the exchange rate. Question: What are the advantages and disadvantages of a flexible exchange rate regime relative to a fixed regime? Floating exchange rates also have disadvantages: Higher volatility: Floating exchange rates are highly volatile. 2. Advantages and Disadvantages of Flexible Exchange Rate Systems. What are the advantages and disadvantages of a flexible exchange rate regime relative to a fixed regime? is a flexible exchange rate system solely determined by market forces of demand and supply . This system is the opposite of a fixed exchange rate system. Under the latter system, the exchange rate is pegged at a certain level and does not move. 10,000. For example, if a country suffers from a deficit in the balance of payments then, other things being equal, the country's currency should depreciate. The previous discussion summarizes the textbook advantages and disadvantages of different exchange rate regimes. It has higher volatility. The renminbi has become more flexible over time but is still carefully managed, and depth and liquidity in the onshore FX market is relatively low compared to other countries with floating exchange rates. . On the basis of information given below, calculate National Income (5 Marks) 3.b. Prices are relatively stable, here price changes are relatively low and does not increase as rapidly as in a floating exchange-rate system. However, by devaluing, government . 9. Rent. The fixed exchange rate is determined by government or the central bank of the country. It is because of speculation there occurs dis­ruptive hot money flows. In fixed exchange rate regime, a reduction in the par value of the . On the basis of information given below, calculate National Income (5 Marks) Items. 14) For each of the following cases indicate the expected change in the equilibrium exchange rate (€/$). It offers protection from external economic events. This tends to Increase price and hoarding activities in country. Rs. Answer: In a fixed rate system, nobody needs to worry about currency volatility and, to an extent, price volatility. The foreign exchange market is busy at all times by changes in the exchange rate. Disadvantage of Flexible Exchange Rates. Ballet is a beautiful and demanding art form, with positions and moves to memorize and, often, strained muscles to heal. This brings both advantages and. I. Pros and Cons of Different Monetary Regimes Much has been written on the arguments for fixed versus flexible exchange rates.2 The Nominal Anchor Argument for Fixing the Value of Currency There are a variety of advantages to fixed exchange rates. If you believe a central bank should inflate your currency to stimulate your economy, or to discourage imports, you lose that ability. A floating exchange rate is highly volatile. Gradually, China is allowing a greater role for market forces within the existing regime, and greater two-way flexibility of the exchange rate. Large foreign exchange reserves not required. To maintain at the target level, the government actively intervenes in the market. If a currency is widely available on the market - or there isn't much demand for it - its value will decrease. Firstly, it requires the country to maintain a huge currency reserve. 3.b. It provides more certainty about import and export prices. It also helps the smaller countries to avoid devaluation. Saudi Arabia did that because its primary export, oil, is priced in U.S. dollars. Wages. Explain which regime you would recommend for a small, developing nation with several underdeveloped industries? Plus, short-run volatility in this kind of market can't be explained by macroeconomic fundamentals. Advantages of fixed exchange rates Certainty - with a fixed exchange rate, firms will always know the exchange rate and this makes trade and investment less risky. The following information is available for an economy. Low Elasticities: The elasticities in the international markets are too low for exchange rate, variations to operate successfully in bringing about automatic equilibrating adjustments. Flexible exchange rate system is claimed to have the following advantages: 1. They point out that destabilizing speculation is less likely to occur when exchange rates adjust continuously than when they are prevented (a) Fixed exchange rate prevents the member countries from the economic fluctuation which can weaken the economic policies. Advantages of Fixed Exchange Rate Mechanism: 1. The disadvantages of a fixed exchange rate increases as an economy's integration to the world financial markets increases (Ishfaq 1-21). 3. A country's macroeconomic fundamentals affect the floating exchange rate in global markets, influencing the flow of portfolios between countries. Independent Monetary Policy: Under flexible exchange rate system, a country is free to adopt an independent policy to conduct properly the domestic economic affairs. Cheat Sheet / Updated 04-27-2022. This would make a countries export more competitive which might lead to a disagreement between countries as they might see it as an unfair trade advantage.Flexible Advantages As the exchange rate . Devaluation Devaluation is a downward adjustment to the country's value of money relative to a foreign currency or . Flexible exchange rate is the system which is dependent on the demand and supply of the currency in the market. 13) Explain how trade may reduce pressure for immigration. It is left to the market forces to do this. For example, if you go to Saudi Arabia, you always know a dollar will buy you 3.75 Saudi riyals, since the dollar's exchange rate in riyals is fixed. Deciding authority. Discuss the advantages and disadvantages of fixed exchange rate? FREELY FLOATING EXCHANGE RATE. It also allows the central bank to use other policies, such as interest rates, to stabilize exchange rate movements, not just using foreign exchange reserves. It is because of speculation there occurs disruptive hot money flows. Additionally, macroeconomic fundamentals cant explain especially short-run volatility in floating exchange rates. (Chicago: 1953); and Harry Johnson, "The Case for Flexible Exchange Rates, 1969" in Further Essays in Monetary Economics . In a flexible exchange rate system currency values change on a daily basis. Absence of speculation - with a fixed exchange rate, there will be no speculation if people believe that the rate will stay fixed with no revaluation or devaluation. In recent . A floating exchange rate is based on market forces. Rs. A flexible exchange rate is a rate which, like the price of a commodity, is determined by forces of demand and supply in the foreign exchange market. 3. 1. Answer: Flexible exchange rate system is claimed to have the following: Flexible Exchange Rates Create a Situation of Instability and Uncertainty. After a few experiences with flexible exchange rates during the 1920s . 10,000. Flexible exchange rate enhances the efficiency in the economy by achieving optimum: resources allocation. 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