International Economics

(a) What are the alleged advantages of a fixed over a flexible exchange rate system?

How do advocates of flexible exchange rates respond?

Fixed exchange rate system guards against wild day-to-day fluctuations which discourage specialization in production and flow of international trade and investment a position that advocates of flexible exchange rate detest. They aver that destabilizing speculation is less likely to occur when exchange rates adjust continuously.

In the wake of alleged advantages that fixed exchange rate has over flexible exchange rate it has been established that pegging exchange rate at a given unit has its inherent excesses in demand or supply with regard to foreign exchange. Flexible exchange rate is regarded as efficient because exchange rate does not have to change to correct the equilibrium in the nation's balance of payments (Salvatore, 1996). Flexible exchange rates are integral when it comes to correcting balance of payments...
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