3. Exchange Rates
It is value of one nations currency in
comparison to another
Types:
1) Fixed Exchange Rate
2) Floating Exchange Rate
4. Fixed Exchange Rates
A fixed exchange rate pegs one
country's currency to another country’s
currency
The government of a country doesn’t
let the exchange rate change in
accordance with the demand and
supply for the currency
The purpose of a fixed rate system is
to maintain a country’s currency value
within a very narrow band.
5. Country with Fixed Exchange
Rate
Country Currency Peg Rate Peg Currency
Bermuda Bermuda
Dollar (BMD)
1 USD
UAE Dirham 3.673 USD
Denmark Danish Krone 7.46 EUR
Nepal Rupee 1.6 INR
Latvia Lats (LVL) 0.7028 EUR
6. Benefits
Promote International Trade
Helpful for Small Nations
Restricts Speculation
Major Crisis
Mexican Peso Crisis, 1994
Asian Currency Crisis, 1997
7. Breakup of Fixed Exchange
Rate
Macroeconomic Policy Package of
1965-1968 i.e.,
1) Finance Vietnam Conflicts
2) Own welfare programs
In August 1971, US President
announced that dollar was no longer
convertible into gold
By March 1973, most of the currency
began to float against each other
8. Floating Exchange Rate
System
A country's exchange rate regime
where its currency is set by the
foreign-exchange market through
supply and demand for that particular
currency relative to other currencies.
Most widely traded currencies: US
dollar, Euro, Japanese Yen, British
pound & Australian Dollar
9. Benefits
Automatic BOP adjustments
Independent Monetary Policy
Promotes Economic Development
Increase in Liquidity
10. Conclusion
There is no right answer for which
exhange rate is better
Advanced Economy: Floating Rate
Emerging Economy: May gain from
floating rate
Underdeveloped Economy: Fixed
Rate