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Fixed Exchange Rate and Floating Exchange Rate Systems - Assignment Example

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Fixed Exchange Rate and Floating Exchange Rate Systems

Under the system of Bretton Woods, the various countries’ major currencies were used to be fixed in relation to the Dollar while the Dollar was fixed with respect to the value of gold. This system indicated that the threat of currency instability was to be abided by the governments. As a result of this system, the corporation houses were to deal with lesser trading activities related with foreign currencies on a large volume. The system of the Bretton Woods Agreement at that time was factually capable of providing significant firmness within the markets of currencies (Hussain, 2010). The governments prefer fixed exchange rates to floating exchange rates which is prevalent at present in the world economies because under the later system, the currencies’ demand and supply factors are the determinant of the rate of exchanges within the market of foreign exchange. The governments prefer fixed exchange rates to floating exchange rates which is prevalent at present in the world economies because under the later system, the currencies’ demand and supply factors are the determinant of the rate of exchanges within the market of foreign exchange. Thus, the governments’ power over the fluctuations of the currency valuation gets removed under the floating rate system. Along with this fact, the risk associated with the currency and financials appears in privatised form (Ono, 2004). On the other hand, the distinctive system of the fixed exchange rate allows the governments or respective authorities to bestow controls over certain tools of the monetary policy such as that of the regulation on the rates of interests and supply of money through issuing fresh bills. However, the authorities in charge of the monetary policies function under the control and regime of a board of currency which allows the authorities to enhance the money supply only after ensuring that the particular country has sufficient reserves of the foreign currency that are essential for backing up the enhancement of domestic currency within the nation (International Monetary Fund, 2009). More precisely, it is due to the following advantages of fixed exchange rates in the international monetary system that government prefers to preserve it. Firstly, due to the existence of fixed exchange rate system, price constancy in the international trading market can be ensured for the purpose of effective performance on trading. Price stability in the international trading market aids towards its growth and it also assures less risk for the businesses. Secondly, fixed exchange rates are termed to be inclined towards policies against inflation under this system. The countries are required to operate under strict policies related to both monetary as well as fiscal administration. Thirdly, the regimes under the system of fixed exchange rate demand from the Central Bank that it should uphold huge amount of foreign reserves in the form of both hard currencies and gold as well. This requirement of the fixed exchange rate regime helps in backing up risks that can arise due to any adverse situation of the international market (Fordham University, 2011). Along with the above mentioned benefits, another essential benefit sought by the government that make the fixed exchange rate system preferable for the government is that fixed rates are highly ...Show more

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Evaluation of the Governments’ and Private Investors’ Preference towards Fixed Exchange Rate and Floating Exchange Rate Systems Respectively
Evaluation of the Membership Positions of Greek and Irish Government in the Eurozone in Responding towards the Financial Crisis …
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