Share
Explore BrainMass

Difference in fixed exchange rate and floating rate systems

Explain the major differences in the fixed exchange rate and floating rate systems. You need to compare the systems in terms of their impacts on the effectiveness of monetary and fiscal policies, on the trade balances, and price and output stabilities.

Solution Preview

The floating exchange rate is a market-driven price for currency, whereby the exchange rate is determined entirely by the free market forces of demand and supply of currencies with no government intervention whatsoever. For the managed floating system, the overall exchange rate is determined by free movement of demand and supply but the monetary authorities intervene at certain times to "manage" the exchange rate to prevent high volatilities. This is how the government policies impact and affect the overall exchange rate.

On the other hand, the fixed exchange rate, the government is unwilling to let the country's currency float freely, and they state a level at which the exchange rate will stay. This is how the government of China operates. ...

Solution Summary

Difference in fixed exchange rate and floating rate systems are explained. The systems are compared in terms of impacts on the effectiveness of monetary and fiscal policies.

$2.19