fixed vs flexble exchaneg rate.pptx yogish

Fixed exchange rate and fluctuation exchange rate

1. TOPIC :- Fixed Exchange Rate And Flexible Exchange Rate Presented by :- Yogesh karanth I I - M B A Sahyadri Commerce And Management College, Shivamogga. KUVEMPU UNIVERSITY

2. What is fixed exchange rate Fixed exchange rate system is referred to as the exchange system where the exchange rate is fixed by the government or any monetary authority. It is not determined by the market forces.

3. Flexible exchange rate Flexible exchange rate system is the exchange system where the exchange rate is dependent upon the supply and demand of money in the market.

4. Fixed Exchange Rate vs flexible exchange rate regime No Fixed Exchange Rate Flexible Exchange Rate Regime 1 Fixed exchange rate is determined by the government. It is determined by the forces of demand and supply in the international money market. 2 Changes are planned and introduced by the government or central bank. Changes are linked to demand and supply forces. 3 As set and maintained by the government, the fixed rate of exchange leads to devaluation and revaluation. As determined by the forces of demand and supply, it leads to depreciation and appreciation. 4 To maintain the fixed rate of exchange at a particular level, the government needs to keep a large stock of foreign exchange. Flexible exchange rate does not require any large stock of foreign exchange, as it is set by the market forces of demand and supply. 5 Degree of speculation is very low in the system of fixed exchange rate. Degree of speculation is very high in the system of flexible exchange rate. V s

5. Advantages and Disadvantages of Fixed Exchange Rates Advantages of fixed exchange rates include: Stability: Fixed exchange rates provide stability in currency values, promoting confidence in trade and investment. Reduced Transaction Costs: Businesses can conduct international transactions with more certainty and fewer risks of exchange rate fluctuations. Price Transparency: Fixed exchange rates facilitate price transparency, as businesses can plan their pricing strategies without the uncertainty of currency fluctuations.

6. Disadvantages of fixed exchange rates include: Limited Monetary Policy Flexibility: Governments lose some control over domestic monetary policy, as the exchange rate is tied to another currency or a fixed standard. Speculative Attacks: Fixed exchange rate systems can be vulnerable to speculative attacks by traders or investors attempting to profit from a currency crisis. Imbalances and Economic Shocks: Fixed exchange rates may lead to imbalances in trade and difficulties in adjusting to economic shocks, as the exchange rate cannot adjust to changing economic conditions.

7. Advantages and Disadvantages of Flexible Exchange Rates Advantages of flexible exchange rates include: Automatic Adjustments: Flexible exchange rates allow for automatic adjustments to changing economic conditions, helping countries to maintain competitiveness and balance trade. Monetary Policy Independence: Countries with flexible exchange rates have more freedom to implement monetary policies tailored to their domestic economic needs. Resilience to External Shocks: Flexible exchange rates can absorb external shocks, such as changes in global commodity prices or economic crises, without requiring immediate government intervention. Disadvantages of flexible exchange rates include: Exchange Rate Volatility: The fluctuation of exchange rates can introduce uncertainties in international trade, investment, and economic planning. Exchange Rate Misalignment: In some cases, flexible exchange rates may experience misalignments, deviating from their long-term equilibrium values and causing economic imbalances. Currency Speculation: Market speculation and investor sentiment can lead to excessive volatility in exchange rates, impacting currency values and economic stability.

8. Conclusion Understanding the differences between fixed and flexible exchange rates is essential for comprehending the mechanisms and implications of international currency markets. Fixed exchange rates provide stability but limit monetary policy flexibility, while flexible exchange rates offer resilience but introduce exchange rate volatility. Each system has its advantages and disadvantages, and countries may choose the exchange rate regime that aligns with their economic priorities, trade dynamics, and policy objectives.

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