Resolved Question
What are the advantages and disadvantages of a floating exchange rate?
over 2 years ago
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This kind of exchange rate system makes sure that the value of the currency is determined by market forces. Supply of the currency and demand for it help determine the value of the currency. Such systems are usually found in mature economies like the US, Europe and Japan. In theory, the floating rate system corrects any imbalances in an economy.
One major disadvantage of a flexible exchange rate is that it creates uncertainty in global trade. Because exchange rates fluctuate, there is the risk of reducing or increasing costs when engaging in international trade.
over 2 years ago
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Unlike the fixed exchange rate, the floating rate is determined through forces of supply and demand. That means its "self-correcting" since it automatically adjusts to keep the country's current account balanced. The disadvantage is that it tends to create uncertainty in the global markets. For instance, businesses that import some of their raw materials have to deal with exchange rate risk in that sometimes their imports are more expensive because of changes in the exchange rates. It can also give that country a disadvantage in trade, particularly when their local currency is appreciating. When that happens, their products become more expensive in the international market, making it less appealing to foreign buyers.
over 2 years ago
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The advantages of floating exchange rates are automatic adjustments of balanced payment, freeing internal policy, flexibility, payments and lower foreign exchange reserves. The disadvantages of it are uncertainty, lack in investments, lack of discipline in economic management and inflation.
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