that countries have entered into to bring about stability in their external accounts.
7 views
0 votes
0 votes
Discuss some of the exchange rate arrangements that countries have entered into to bring about stability in their external accounts.
User Avatar
by
12.8k points

1 Answer

0 votes
0 votes
 
Best Answer

To combine the two extreme positions of ‘fixed' and ‘flexible,' governments utilize the following exchange rate arrangements to ensure stability to their external accounts:

i. Wider Bands: Wider bands refer to a method that allows for changes in a fixed exchange rate. It only allows for a 10% difference in currency values between any two countries. For example, a country's balance of payments (BOP) deficit can be reduced by devaluing its currency, which increases demand for local goods as the purchasing power of foreign currencies rises. This results in a rise in exports, which improves the BOP.

 ii. Crawling Peg: The crawling peg system provides for continual and regular exchange rate modifications. At any given time, just 1% fluctuation is permitted.

 iii. Managed floating: Managed floating is a program in which the government intervenes to modify the exchange rate when circumstances need it.

As with crawling pegs and wider bands, there is no set limit to variation. The rate at which one currency is exchanged for another is referred to as an exchange rate in finance.

 The float, fixed-rate, and pegged float exchange rate systems are the three basic types of exchange rate systems.

• Floating exchange rate: Also referred to as a floating exchange rate. A system in which the value of a currency about other currencies is permitted to vary freely according to market forces. A floating currency, such as the dollar, is an example. Floating exchange rates, according to many economists, are the greatest conceivable exchange rate regime since they naturally react to economic conditions. 

Fixed exchange rate system: A fixed exchange rate system is also known as a pegged exchange rate system. A system in which the value of a currency is linked to the value of another single currency, a basket of currencies, or another monetary metric, such as gold. A country's central bank is always committed to buying and selling its currency at a predetermined price. The gold standard is the most well-known fixed rate system, in which a unit of currency is linked to a set amount of gold. The Bretton Woods System, in which all currencies are tied or linked to the US dollar, is the second key one. China's fixed exchange rate is well-known. It was one of the few countries that could establish a fixed rate by making trading its currency at any other rate unlawful.

•Pegged float exchange rate: A currency system in which the exchange rate is fixed around a specific value but allows for fluctuations, usually within set limits. These regimes are a mix of fixed and floating. Crawling bands, crawling pegs, and pegged with horizontal bands are the three forms of pegged float regimes.

Managed Floating, often known as dirty floating, is another popular exchange rate nowadays. It's a hybrid of a floating exchange rate system and a fixed rate system (the float component) (the managed part). It's best described as a system in which exchange rates are permitted to vary within a set range from day to day before the central bank intervenes to alter them.

User Avatar
by
12.8k points

Related questions

Shivam mathur Asked May 12, 2023
6 views
Shivam mathur Asked May 12, 2023
by Shivam mathur
19.7k points
1 answer
0 votes
0 votes
6 views
1 answer
1 vote
1 vote
4 views
1 answer
0 votes
0 votes
7 views
1 answer
0 votes
0 votes
5 views
1 answer
1 vote
1 vote
8 views
1 answer
0 votes
0 votes
6 views
1 answer
0 votes
0 votes
7 views
WELCOME TO ANSWER AVENUE, WHERE YOU CAN ASK QUESTIONS AND RECEIVE ANSWERS FROM OTHER MEMBERS OF THE COMMUNITY.

Categories