This presentation explains the types of exchange rates, merits and demerits of exchange rates

1. ARGUMENTS FOR FIXED AND
FLUCTUATING EXCHANGE RATES
(Merits & Demerits)

2. Exchange rates
 Fixed exchange rates
 Flexible exchange rates

3. FIXED EXCHANGE RATES

4. Fixed exchange rates
 Here, All exchange transactions
take place at an exchange rate fixed
by the monetary authority (central
bank)

5. MERITS/ FAVORUS
 It makes the price of goods involved in trade more
predictable
 It ensures regular flow of foreign capital (element of
certainty)
 No fear of depreciation/ appreciation of currency
(improves confidence)
 No fear of wide fluctuations in exchange rate
 Removes the dangers of speculation
 It promotes international monetary co-operation
 Healthy growth of foreign trade because of standard
financial policies

6. Demerits/ against
 Complex system which requires highly skilled authorities
to operate
 It imposes large social costs within the country
 Country which follow this system should maintain large
reserves of foreign exchange to avoid devaluation
(burden)
 Here countries should adopt strict and complicated
exchange control measures (mal-allocation of resources)
 BOP position always leads the country to change the
exchange rates
 Fixed exchange rates solve the deficit BOP problem
temporarily
 Objectives of full employment and economic growth are
sacrificed so as to remove BOP disequilibrium.

7. FLEXIBLE EXCHANGE
RATES

8. Flexible exchange rates
 It is also called floating / fluctuating
exchange rates. Exchange rates is determined
by the demand for and supply of a currency
 Supply of a currency exceeds its demand, the
value of that currency in foreign exchange
markets will fall and vice versa

9. Merits
 It deals with the BOP problems automatically
 Objectives of full employment and economic growth are
not sacrificed so as to remove BOP disequilibrium
 Country need not maintain large amount of foreign
exchange reserves
 It is not necessary to impose strict trade restrictions and
exchange control
 Floating system safeguards the internal economy from
international disturbances
 Comparative advantage of a particular commodity is
identified easily
 Over valuation or under valuation of currency of a country
is avoided

10. Demerits
 Exchange rates are frequently adjusted (brings
uncertainty)
 It affects the growth of foreign trade
prominently
 Speculation worsens fluctuations in exchange
rates.
 Flexible exchange rates brings inflation
 It may not possible to determine exchange rate
appropriately (the country my not get correct
idea about the market conditions)

11. Conclusion
Governments mostly track fixed
exchange rates which require
necessary adjustments in the BOP
by adopting policy measures