Hi, I need some assistance answering the following two questions:
1. What are the different types of exchange rate, their advantages and disadvantages?
2. During the middle years of this decade, the exchange rate of the U.S. dollar has declined against the currencies of its major trading partners. You would expect this to result in a corresponding increase in U.S. dollar denominated import prices from those trading partners. U.S. dollar import prices, however, often rise less than the increase in the currency value of the exporter. Why?
The two major types of exchange rates are fixed and floating exchange rates.
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.
Pros & Cons of Floating Exchange Rate:
The floating exchange rate boasts various merits. Firstly, there is automatic correction in the floating exchange rate as the country simply lets it move freely to the equilibrium of demand and supply. Secondly, there is insulation from external economic events as the country's currency is not tied to a possibly high world inflation rate as is under a fixed exchange rate. The free movement of demand and supply helps to insulate the domestic economy from world economic fluctuations. Thirdly, governments are free to choose their ...