what are exchange rates? what are ixed and flexible exchange rates?
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A fixed exchange rate denotes a nominal exchange rate that is set firmly by the monetary authority with respect to a foreign currency or a basket of foreign currencies. By contrast, a floating exchange rate is determined in foreign exchange markets depending on demand and supply, and it generally fluctuates constantly.
A flexible exchange-rate system is a monetary system that allows the exchange rate to be determined by supply and demand.
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BASIS FOR COMPARISON FIXED EXCHANGE RATE FLEXIBLE EXCHANGE RATE
Meaning Fixed exchange rate refers to a rate which the government sets and maintains at the same level. Flexible exchange rate is a rate that variate according to the market forces.
Determined by Government or central bank Demand and Supply forces
Changes in currency price Devaluation and Revaluation Depreciation and Appreciation
Speculation Takes place when there is rumor about change in government policy. Very common
Self-adjusting mechanism Operates through variation in supply of money, domestic interest rate and price. Operates to remove external instability by change in forex rate.
fixed vs flexible exchange rateFixed exchange rate and flexible exchange rate are two exchange rate systems, differ in the sense that when the exchange rate of the country is attached to the another currency or gold prices, is called fixed exchange rate, whereas if it depends on the supply and demand of money in the market is called flexible exchange rate.
The depreciation of Indian Rupee against US dollar is the common headline of almost all news dailies, since past few years. Not only India but the primary concern of the monetary policy of all the countries focus on stabilising the exchange rate. However, still, a major section of society is unaware about currency fluctuations in the international market, as they do not have sufficient knowledge.
First of all, you need to know what exchange rate is? As its name suggests, it is a rate at which the currency of one country can be exchanged (converted) for another. Exchange rate regime or system refers to a set of international rules that manages the setting of exchange rates and the foreign exchange market. Take a read of this article, to know the important differences between fixed and flexible exchange rates.