A floating exchange rate is when a currency's value is determined by market forces of supply and demand, without direct government or central bank control. Examples include the US dollar and the euro.

What is fixed foreign exchange rate:

A fixed exchange rate is when a currency’s value is pegged to another currency, a basket of currencies, or a commodity like gold. Examples include the Hong Kong dollar.

Advantages of floating foreign exchange rate:

Adjusts automatically to economic conditions.
Helps absorb external economic shocks.
Reduces the need for large foreign exchange reserves.

Advantages of fixed foreign exchange rate:

Provides stability and predictability for trade and investment.
Helps control inflation by linking to a stable currency.
Prevents excessive currency fluctuations.

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indu marath

Mar 19

What are the economic conditions that influence a country's choice between floating and fixed exchange rates?
How do speculative attacks affect countries with fixed exchange rate systems?
What are the risks associated with a floating exchange rate in times of economic uncertainty?
How do international organizations, like the IMF, assist countries in managing their exchange rate systems?
How does currency depreciation or appreciation occur under a floating exchange rate system?

Keywords:

Floating exchange rate, fixed exchange rate, supply and demand
Government intervention, currency depreciation, currency appreciation
Exchange rate stability, market forces

Eshaaan

Mar 20

Replying to

A country’s choice depends on factors like inflation stability, trade dependence, capital mobility, and monetary policy control. Stable economies with strong reserves may prefer a fixed rate, while those needing flexibility opt for a floating rate.
Speculative attacks occur when investors bet against a fixed currency, forcing central banks to use reserves to maintain the peg. If reserves run out, the country may be forced to devalue its currency, leading to financial crises.
A floating rate can lead to high volatility, making trade and investment uncertain. Rapid depreciation can increase inflation, while sudden appreciation can hurt exports by making them more expensive.
The IMF provides financial aid, policy advice, and technical assistance to help stabilize currencies, manage reserves, and implement reforms during crises.
Currency values fluctuate based on supply and demand in the foreign exchange market. Depreciation happens when demand for a currency falls, while appreciation occurs when demand rises due to factors like interest rates, trade balance, and investor confidence.

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