A fixed exchange rate/Gold Standard is, “Monetary system in which the standard unit of currency is a fixed quantity of gold or is freely convertible into gold at a fixed price” (Britannica. com).
The fixed rate developed from the Bretton Woods conference after WWII. If a country uses this standard to pay for imports and such they must have the gold to back up the paper money they give the exporter. In this example, we will use the U. S. and the U. K. again. If the U. S. wants to pay the U. K. for double decker busses for a new tourism program, they must have enough gold in their reserves to give the U.
K to equal the paper currency amount given at time of sale. If the gold rate is $3. 00 U. S. per ounce and the U. K. was ? 4. 00 total value is $. 75/?. A floating exchange rate is, “A country’s exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. Thus, floating exchange rates change freely and are determined by trading in the forex market. This is in contrast to a “fixed exchange rate” regime. ” (Investopedia. com) This can be a managed float or an independent floating rate.
The Essay on Fixed vs Floating Exchange Rates
Introduction: This essay will discuss the two forms of exchange rate regimes for a country, namely: a fixed exchange rate and a flexible exchange rate. I will discuss some advantages and disadvantages of these regimes and will comment on their effectiveness in small economies. Although every country differs and there is therefore not only one correct regime for all small economies, there are some ...
Employment can rise, people spend, and eventually the economy stabilizes again. The cycle starts all over with the currency having a high value again. The downside to floating rates follows: •If the market is on a downward shift, the currency can be as well. •The central bank does not have as much control to control the rate as it would with a fixed system. •Other countries can buy or sell each other’s currency to affect the value and the market. I have noted information on both types of rates. Now, on to the conclusion of this thesis. In my studies and studies I have read, there is information to provide substantiation to both sides.
With a fixed rate, the money supply can be controlled a bit easier by buying or selling if needed by home countries to control rates to give the home country control over its currency. On a floating system, if the currency is gaining value in the global market, then other nations can purchase it and this can affect another country’s inflation rate. With a floating rate the central bank is not the only power authority and other countries can determine how the other’s money supply is valued. I believe that if you have two countries on a floating rate, they each can control one another too easily.
When the U. S. was on a fixed system, the money supply was regulated by the central bank solely and the dollar went through devaluation periods. When it went to the floating rate, it gained value and is one of the strongest currencies in the world. After WWII, there was such inflation that central banks could not control it. Being on a fixed rate controlled this and brought value back to these currencies. However, it did not last long and currencies went through devaluation periods. After weighing the studies, my mind has been changed and I believe that a floating rate is the better method.
