Explain two merits each of flexible foreign exchange rate and fixed foreign exchange rate.
CBSE OUTSIDE DELHI - SET 1 2009
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Merits of fixed exchange rate:
- It ensures stability in exchange rate: The exporters and importers have not to operate under uncertainty about the exchange rate. Thus it promotes foreign trade.
- It promotes capital movements: Fixed exchange rate system attracts foreign capital because a stable currency does not involve any uncertainties about exchange rate that may cause capital loss.
- It eliminates the problem of overvaluation or undervaluation of currencies, Deficit or surplus in balance of payments is automatically corrected under this system.
- It frees the government from problem of balance of payments, as it is taken care of by the forces of demand and supply.
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