1.

Distinguish between the fixed exchange rate and flexible exchange rate. If exchange rate falls, explain its effects on exports and imports.

Answer»
Basis of DistinctionFixed Foreign Exchange RateFlexible Foreign Exchange Rate
(i) MeaningFixed exchange rate means the exchange rate which is officially declared and fixed.Flexible exchange rate means the exchange rate which is floating because it is determined by demand and supply.
(ii) Governments RoleIt requires regular control and monitorina by the government.It does not require any intervention by the government.
(iii) StabilityIt is stable and certain and not subject to wide fluctuations.It is uncertain and subject to wide fluctuations.
(iv) SpeculationIt checks speculation in foreign exchange market.It encourages speculation.

 

If exchange rate falls, there would be increase in value of domestic currency in terms of foreign currency. Such a situation is known as appreciation of domestic currency. Appreciation makes domestic goods dearer (costly) for the foreigners and consequently exports may fall. Appreciation makes foreign goods cheaper for the people of domestic country and consequently imports may rise.


Discussion

No Comment Found

Related InterviewSolutions