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The British Economy - Essay Example

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All the major economies of the world were following the exchange rate system. This system valued money based on the price of gold initially and then it started being based on the value of the US dollar. These exchange rates were desirable for the governments…
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The British Economy
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Download file to see previous pages A fixed exchange rate system as the name suggests, is a system in which the country in question is striving to prevent the exchange rate of the currency to change with the change is balance payments of deficits. This is a system which needs other accompanying systems to make it work (Pitt, 2001).
When this system is to be implemented, the government uses certain measures and implements some specific rules. Usually, these rules include the fact that when interventions in the foreign markets are made, there should be macro-economic adjustments so that the income which is spent on imports is reduced. Along with that, protective tariffs are imposed so that the number of imports can be reduced to a desirable level. This system also includes some rules in which there is a restriction on the amount of foreign currencies that can be bought (Barro, 2008).
The reason why a fixed exchange rate is used is that it provides certain benefits for the exporters. The basic reason why the exporters benefit from a fixed exchange rate is that there is greater certainty of the rates and the income which would be ultimately received from the export. The exporters have to take lesser risks and can guarantee results that would be more or less near to the things which are predicted (Pitt, 2001).
The fixed exchange rate also enables the domestic firms and their workers to make them more disciplined. They enforce the idea that the costs of the company should be kept under a strict balance because that is the only way in which the company is able to compete in the international market. When the domestic firms are watching their costs, the government is able to control inflation and that in turn would control the interest rates (Barro, 2008).
The years 1876 to 1913, were the ones in which the rate of a currency was established on the basis of that currency’s comparative conversion into an ounce of gold. This ...Download file to see next pagesRead More
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