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fixed exchange rate
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fixed exchange rate
Definition
F
What is fixed/pegged exchange rate?
E
A fixed exchange rate is when a country ties the value of its currency to some other widely-used commodity or currency.
Today, most fixed exchange rates are pegged to the US Dollar. Because the dollar is used for most transactions in international trade.
Advantages and disadvantages of fixed exchange rate
D
C
Advantages
Provides currency stability
- investors always know what the currency is worth
-that makes the country's business attractive to foreign direct investors (they dont have to protect themselves from wild swings in the currency's value)
A country can avoid inflation
-it benefits from the strength of that country's economy
without that fixed exchange rate, the smaller country's currency will slide, making import goods from the large economy more expensive
B
Disadvantages
Discouraged foreign investment
-fixed exchange rate are not permenantly fixed or rigid
-it discourages long-term foreign investment which is considered available under the really fixed exchange rate system
monetary dependance
-it requires a country to persue a policy of monetary expansion or contraction in order to maintain stability in its rate of exchange.