question_answer

Discuss briefly the meanings of:

(i) Fixed Exchange Rate

(ii) Flexible Exchange Rate

(iii) Managed Floating Exchange Rate

Answer:

(i) Fixed Exchange Rate: Fixed exchange rate is the rate which is officially fixed by the government/monetary authority on a daily or monthly basis. In this system, foreign central banks stand ready to buy and sell their currencies at a fixed price. A typical kind of this system was used under gold standard system in which each country committed itself to convert freely its currency into gold at a fixed price.

(ii) Flexible exchange Rate: It is the rate which is determined by market force of supply and demand in the foreign exchange market. There is no official intervention. Here, the value of a currency is left completely free to be determined by market force of demand and supply of the currencies concerned. Under this system, the central banks, without intervention, allow the exchange rate to adjust so as to equate the supply and demand for foreign currency.

(iii) Managed floating Exchange Rate: It is also called Dirty floating exchange rate. It is a system of floating exchange rate (where exchange rate is determined by the forces of demand and supply) but the one which the central bank of the country tries to manage by way of planned sale and purchase of foreign currencies in the international money market.