The fixed exchange rate system
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Under a fixed exchange rate system, governments try to maintain a constant value for their currencies against other currencies. A country's central bank commits to buying and selling its currency at a fixed price in order to maintain this exchange rate. Fixed exchange rates provide stability for international trade and control of inflation. Governments intervene in currency markets by buying and selling their own currency to influence supply and demand and maintain the fixed exchange rate when market forces would otherwise cause the rate to change.
The fixed exchange rate system
- 1. The Fixed Exchange Rate System
- 2. fixed exchange rate system This system is a currency system in which governments try to maintain their currency value constant against one another.
- 3. In a fixed exchange-rate system, a country’s government decides the worth of its currency in terms of either a fixed weight of gold, a fixed amount of another currency or a basket of other currencies. The central bank of a country remains committed at all times to buy and sell its currency at a fixed price. The central bank provides foreign currency needed to finance payments imbalances
- 5. WHY FIXED EXCHANGE RATE SYSTEM? The fixed exchange rate is usually adopted with a mind to have a stabilizing effect on the value of domestic currency against foreign currencies. It simplifies issues of international trade between two countries as expectations are more or less defined It is also a tool for control of inflation. It also restricts governments from manipulating domestic policy to serve the requirements for economic stability on a macro level.
- 6. Usually a government achieves this by simply trading its currency on the international market. This explains the need for governments to keep a stock of foreign currency. What usually takes place here is a kind of speculation game by the government. If the exchange rate drops, then the government purchases its own currency and uses it as a reserve. This creates a demand for that particular currency and it increases the price. If the exchange rates rise then the government sells its currency which results in an increase in its foreign reserves. So how does a government maintain a fixed exchange rate?
- 7. HOW DOES A GOVERNMENT MAINTAIN A FIXED EXCHANGE RATE? Dc* Sc Dc E Quantity of £ Quantity of $/£
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