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Fixed and Floating Exchange

Discuss the relative merits of a fixed and a floating exchange rate. From an international business perspective, which criteria is the most important relative to a choice between systems and why?

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Discuss the relative merits of a fixed and a floating exchange rate. From an international business perspective, which criteria is the most important relative to a choice between systems and why?

A fixed exchange rate system is about maintaining monetary discipline, stopping or at least limiting speculation and thereby uncertainty. A fixed exchange rate system operates on the premise that there is no close connection between the trade balance and exchange rates. Maintaining monetary discipline means governments must maintain a fixed exchange rate parity that ensures countries do not expand their money supplies which can cause inflation. A fixed exchange rate system attempts to stop the possibility of speculation which can cause fluctuations and volatility in exchange rates and therefore increase uncertainty in the economy of a given country. A fixed rate exchange rate system does not use trade balance adjustments because it maintains that there is no close link ...

Solution Summary

This is a discussion of the relative merits of a fixed and a floating exchange rate from an international business perspective, and which criteria is the most important relative to a choice between systems and why.

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