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Exchange Rates - Essay Example

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For example, in flexible exchange rate administration, the governments locate their money supplies and allow the exchange rates liberally adjust according to the ensuing ratio of the two money supplies…
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Exchange Rates Task: Exchange Rates There are several differences between flexible and fixed exchange rates. For example, in flexible exchange rate administration, the governments locate their money supplies and allow the exchange rates liberally adjust according to the ensuing ratio of the two money supplies. However, in a fixed rate administration, one of the two nations, with the agreement of the other, situates the exchange rate and allows its money distribution to adjust to suit to the level needed (Barro, 2008). Furthermore, in flexible exchange rate administration, the government upholds direct command of its money supply and loses the control over the exchange rate. However, the opposite happens in fixed rate regime.
Furthermore, in fixed exchange rate the price of one currency is permanent comparative to all other currencies by state authority. However, in flexible or the floating exchange rate system, the value of a currency is permitted to vary in reaction to the forces in the market. Alternatively, under the fixed exchange rates, expansion of money reduces interest rates thus leading to outflows of capital. The eventual loss in coffers lowers the money supply (Jones & Lumby, 2003).
On the flip side, under the flexible regime the exchange rate is depreciated by the capital outflow resulting to a stimulated output (Mukherjee, 2007). Finally, under the fixed exchange rate, positive demand increases interest rates and provokes an inflow of capital that balances the loss of the coffers through deficit of trade. In contrast, under the floating rates the inflow of capital appraises the exchange rates.
References
Barro, R. (2008). Macroeconomics: a modern approach. Mason, OH: Cengage Learning.
Jones, C., & Lumby, S. (2003). Corporate finance: theory & practice. Mason, OH: Cengage Learning.
Mukherjee, S. (2007). Modern Economic Theory. New Delhi, ND: New Age International Read More
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