Question

There are arguments for and against the alternative exchange rate regimes. a) List the advantages of the flexible exchange rate regime. b) Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime. c) Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime.

Answer 1

Answer:

a. The advantages of the flexible exchange rate system include: (I) provides insulation against unemployment problem in other countries and (ii) promotes economic development and helps to achieve full employment in the country, iii) automatically corrects the disequilibrium in the balance of payments.

b. If exchange rates are fluctuating randomly, that may discourage international trade and encourage market segmentation, they are very volatile

c. Economic agents can hedge exchange risk by means of forward contracts and other techniques. In addition, under a fixed exchange rate regime, governments often restrict international trade in order to maintain the exchange rate.

Explanation: