Plz explain international mobility of liquidity and optimum resource allocation as merits of flexible exchange rate?I had posted previous also.plz help I am not understanding these points.plz give them some more detail with example of each.
Answers
Following are the advantages of flexible exchange rates:
The flexible exchange rate system is the one where the exchange rate is decided by market forces of demand and supply. It eliminates the need for official foreign exchange reserve that solves the problem of international liquidity this is known as international mobility of liquidity.
As the exchange rate is determined where the demand of foreign exchange meets its supply this is known as optimum resource allocation. It leads to equilibrium exchange rates of different currencies. It plays an important role in an allocation of foreign exchange resources by adjusting relation between foreign and domestic prices in a flexible manner.
It plays an important role in economic development and promotes efficiency in resource allocation.