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Differences between Flexible and Fixed Exchange Rates - Essay Example

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From the paper "Differences between Flexible and Fixed Exchange Rates" it is clear that 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 the level needed…
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Differences between Flexible and Fixed Exchange Rates
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Extract of sample "Differences between Flexible and Fixed Exchange Rates"

In flexible exchange rate administration, the government upholds direct command of its money supply and loses control over the exchange rate. However, the opposite happens in a fixed-rate regime.

Furthermore, in a fixed exchange rate, the price of one currency is permanent compared to all other currencies by state authority. However, in a flexible or 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, the 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 in 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 a deficit of trade. In contrast, under the floating rates, the inflow of capital appraises the exchange rates. Read More
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(“Exchange Rates Essay Example | Topics and Well Written Essays - 250 words”, n.d.)
Exchange Rates Essay Example | Topics and Well Written Essays - 250 words. Retrieved from https://studentshare.org/macro-microeconomics/1584950-exchange-rates
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Exchange Rates Essay Example | Topics and Well Written Essays - 250 Words. https://studentshare.org/macro-microeconomics/1584950-exchange-rates.
“Exchange Rates Essay Example | Topics and Well Written Essays - 250 Words”, n.d. https://studentshare.org/macro-microeconomics/1584950-exchange-rates.
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