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Discuss briefly the meanings of:
  1. Fixed Exchange Rate.
  2. Flexible Exchange Rate.
  3. Managed Floating Exchange Rate.
CBSE DELHI RE-PAPER SET 2 2018
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  1. Fixed Exchange Rate: Fixed exchange rate (also termed as the pegged exchange rate) is the exchange rate that is determined in a fixed exchange rate system. In this system, the exchange rate is held constant or fixed by the monetary authority of the country. Under this regime, the monetary authority of the country pegs (or, fixes) the value of its currency against various other currencies. This system of exchange rate avoids frequent fluctuations in the exchange rate and makes international trade more predictable. In other words, it ensures guarantee returns to the exporters.
A fixed exchange rate regime has the following two variants.
  1. The Gold Standard System of exchange rate.
  2. The Bretton Woods System system of exchange rate.
  1. Flexible Exchange Rate: Flexible exchange rate is the exchange rate that is determined in a flexible exchange rate system. Under the system of flexible exchange rate, the rate of exchange is determined by the market forces (demand for foreign exchange and supply of foreign exchange) with minimum or no government intervention. The equilibrium exchange rate is determined where the demand for foreign currency is equal to the supply of foreign currency.
The system of flexible exchange rate overcomes the various disadvantages associated with the fixed exchange rate regime. As against the system of fixed exchange rate, flexible exchange rate regime eliminates the need to hold huge gold reserves. Also, since the exchange rate is market determined, it eliminates the problem of overvaluation and undervaluation of currency. Besides this system of exchange rate promotes easy and free capital movements.
  1. Managed Floating Exchange Rate: This rate of exchange is determined in a managed floating exchange rate system. The managed floating system of exchange rate combines the features of both the fixed exchange rate as well as the flexible exchange rate. On one hand, the foreign exchange market is allowed to operate freely and on the other hand, there is an official declaration of rules or guidelines for the intervention by the monetary authority. In other words, the managed floating exchange rate regime determines the exchange rate through the market forces with intervention of the monetary authority as and when required.
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