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Exchange rate under a floating exchange rate scheme (as often does in free market) does not stay constant. It will always fluctuate due to changes in demand and supply.
However, the state can control the supply of the currency (sell off or buy in their currency) in order to control the exchange rate. While this has been the traditional method of limiting currency exchange rate fluctuation, the global scale and scope of currency markets has significantly lowered the ability of a government to affect currency exchange rates via this method. For most major currencies, this adjustment of the currency supply can only push the exchange rate a few percentage in one direction or the other.
Instead, the method most countries wishing to fix their currency exchange rate use is called "pegging" - that is, a country legally fixes the exchange rate against a larger currency (typically the US Dollar, Euro, or Yen), and only allows exchanges of currency at the "official" rate. China is a clear example of this practice, though they are hardly the only one. "Pegging" a currency is generally considered to be a violation of free market principles, because it artificially declares the value of something without consulting the marketplace.
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Advantages of a fixed rate of exchange?
A fixed exchange rate system is one where the value of the exchange rate is fixed to another currency. This means that the government have to intervene in the foreign exchange market to maintain the fixed rate. The equilibrium exchange rate may be either above or below the fixed rate. In Figure 1 below, the equilibrium is above the fixed rate. There is a shortage of the national currency at the fixed rate. This would normally force the equilibrium exchange rate upwards, but the rate is fixed and so cannot be allowed to move. To keep the exchange rate at the fixed rate the government will need to intervene. They will need to sell their own currency from their foreign exchange reserves and buy overseas currencies instead. This has the effect of shifting the supply curve to S2 and as a result, their foreign currency holdings will rise.
What best explains what happens to the exchange rate of a floating currency?
The exchange rate for that currency changes depending on the operations of the free market
Can central banks fix the rate of exchange?
Yes, central banks can fix the rate of exchange through a system known as a fixed or pegged exchange rate regime. In this system, the central bank commits to maintaining the currency's value at a specific rate relative to another currency or a basket of currencies. To maintain this fixed rate, the central bank may intervene in the foreign exchange market by buying or selling its currency. However, sustaining a fixed exchange rate can be challenging and may require substantial reserves and consistent economic policies.
What best explains what happens to the exchange of a floating currency?
The exchange rate for that currency changes depending on the operations of the free market
Does Canada have a fixed exchange rate?
No.
Advantages of a fixed rate of exchange?
A fixed exchange rate system is one where the value of the exchange rate is fixed to another currency. This means that the government have to intervene in the foreign exchange market to maintain the fixed rate. The equilibrium exchange rate may be either above or below the fixed rate. In Figure 1 below, the equilibrium is above the fixed rate. There is a shortage of the national currency at the fixed rate. This would normally force the equilibrium exchange rate upwards, but the rate is fixed and so cannot be allowed to move. To keep the exchange rate at the fixed rate the government will need to intervene. They will need to sell their own currency from their foreign exchange reserves and buy overseas currencies instead. This has the effect of shifting the supply curve to S2 and as a result, their foreign currency holdings will rise.
What best explains what happens to the exchange rate of a floating currency?
The exchange rate for that currency changes depending on the operations of the free market
What is the difference between spot and forward exchange rate?
In forward exchange rate, the rate is booked in advance for a fixed amount and period,which will remain unchanged in case of any market fluctuation or deceleration.In fact forward exchange rate booking is done to protect or guard against volatile market condition. In spot exchange rate, the exchange rate prevalent on a particular date is booked for immediate effect.
Can central banks fix the rate of exchange?
Yes, central banks can fix the rate of exchange through a system known as a fixed or pegged exchange rate regime. In this system, the central bank commits to maintaining the currency's value at a specific rate relative to another currency or a basket of currencies. To maintain this fixed rate, the central bank may intervene in the foreign exchange market by buying or selling its currency. However, sustaining a fixed exchange rate can be challenging and may require substantial reserves and consistent economic policies.
What best explains what happens to the exchange of a floating currency?
The exchange rate for that currency changes depending on the operations of the free market
Does Canada have a fixed exchange rate?
No.
Which is more conducive to international trade the fixed or the floating exchange rate?
fixed rate
Can international business operate more easily in a fixed exchange rate system or in a flexible exchange-rate syatem?
An international business will operate more easily in a fixed exchange rate system. Knowing what the equivalency of goods will allow for predetermined forecasting, however, a fixed rate decreases the opportunity for profits.
What is official and free market rate?
The official exchange rate is the rate set by a country's central bank or government, which may be used for official transactions and to stabilize the economy. In contrast, the free market rate is determined by supply and demand in the open market, reflecting the actual value of a currency based on economic conditions. Discrepancies between the two rates can occur in economies with fixed or managed exchange rates, leading to currency distortions and potential black markets. Understanding both rates is essential for analyzing a country's economic health and currency stability.
What is the difference in how the exchange rate reflects the supply and demand for the currency between a flexible-exchange rate system and a fixed-rate exchange system?
Fixed Exhange-Rate System: currency system in which governments try to keep the values of their currencies constant against one another Flexible Exchange- Rate System: allows the exchange rate to be determined by supply and demand. With a flexible exchange- rate system, exchange rates need not fall into any prespecified range.
When the exchange rate is stated in terms of dollars per euro, undervaluation of the euro relative to the dollar would mean:O Market exchange rate < PPP based Exchange rateO Market exchange rate > PPP based exchange rate?
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What are fixed exchange rate system and currency board system?
A fixed exchange rate system is where a country's exchange rate regime under which the government or central bank ties the official exchange rate to another country's currency (or the price of gold). The purpose of a fixed exchange rate system is to maintain a country's currency value within a very narrow band. Also known as pegged exchange rate. Fixed rates provide greater certainty for exporters and importers. This also helps the government maintain low inflation, which in the long run should keep interest rates down and stimulate increased trade and investment. however I'm not sure what a currency board system is....sorry.
