Question

Distinguish between fixed exchange rate system and flexible exchange rate system.

Hint:

Fixed exchange rates provide stability but require central bank intervention. Flexible rates allow market forces to determine the exchange value.

Answer 1

\[ \begin{array}{|c|c|} \hline \textbf{Fixed Exchange Rate System} & \textbf{Flexible Exchange Rate System} \\ \hline \text{Provides stability for foreign trade and investments.} & \text{Subject to fluctuations, leading to trade and investment uncertainty.} \\ \hline \text{Central banks actively manage the pegged rate.} & \text{Central bank intervention is minimal or absent.} \\ \hline \end{array} \]