In which situation is a country most likely to choose a fixed exchange rate?
Countries prefer a fixed exchange rate regime for the purposes of export and trade. By controlling its domestic currency a country can—and will more often than not—keep its exchange rate low. This helps to support the competitiveness of its goods as they are sold abroad.
Why would a country choose a fixed exchange rate?
Fixed exchange rates work well for growing economies that do not have a stable monetary policy. Fixed exchange rates help bring stability to a country's economy and attract foreign investment. Floating exchange rates work better for countries that already have a stable and effective monetary policy.
In which situation is a country most likely to choose a fixed exchange?
Final answer: A country is most likely to choose a fixed exchange rate when it wants to ensure currency stability in all economic situations, to reduce exchange rate volatility and facilitate stable international trade.
Which country uses a fixed exchange rate?
Countries with fixed exchange rates
Aruba. The Bahamas. Bahrain. Hong Kong.
Why is fixed exchange rate better?
Fixed rates provide greater certainty for exporters and importers. Fixed rates also help the government maintain low inflation, which, in the long run, keep interest rates down and stimulates trade and investment.
Why might a government want a fixed exchange rate quizlet?
-Fixed exchange rates keep prices stable. -Currency manipulation is easier with a fixed exchange rate. Put the steps of a typical currency crisis in order from first to last. - The government commits itself to a fixed exchange rate.
Why might a developing country prefer a fixed exchange rate quizlet?
Why do small countries that trade a lot generally prefer to fix their exchange rates? Fixed exchange rates provide more price stability and reduce risks for exports.
What is a fixed exchange rate quizlet?
Fixed Exchange Rates: An exchange rate system where exchange rates are fixed by the central bank of each country. Floating Exchange Rates: An exchange rate system where exchange rates are determined entirely by market forces.
Which is better fixed or floating exchange rates?
Fixed rates are chosen to force a more prudent monetary policy, while floating rates are a blessing for those countries that already have a prudent monetary policy. A prudent monetary policy is most likely to arise when two conditions are satisfied.
What is fixed exchange rate in simple words?
A fixed exchange rate is a regime imposed by a government or central bank which ties the official exchange rate of the country's currency with the currency of another country or the gold price.
What is the biggest disadvantage of a fixed exchange rate?
Disadvantages of a Fixed Exchange Rate
Lack of Monetary Policy Flexibility: Countries lose the ability to set their own interest rates and conduct independent monetary policy, as they must focus on maintaining the peg.
What are the pros and cons of a fixed exchange rate?
| Fixed Pros | Fixed Cons |
|---|---|
| Enable the currency's value to remain stable | Central bank must intervene often |
| Can help lower inflation which encourages investment | Country loses monetary independence |
| The Central Bank has the power to maintain rate | Can be expensive to maintain |
What country has the best exchange rate?
The Kuwaiti dinar is the strongest currency in the world, with 1 dinar buying 3.26 dollars (or, put another way, $1 equals 0.31 Kuwaiti dinar). Kuwait is located on the Persian Gulf between Saudi Arabia and Iraq, and the country earns much of its wealth as a leading global exporter of oil.
What is an advantage of a fixed exchange rate quizlet?
An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.
Why do fixed exchange rates fail?
Persistent imbalances can lead to pressures on the currency peg. Speculative Attacks: Fixed exchange rate systems can be vulnerable to speculative attacks if investors believe that the currency is overvalued or if there are concerns about the country's ability to maintain the peg.
Why is a weak exchange rate good?
The Bottom Line. Currency devaluations can be used by countries to achieve economic policy. Having a weaker currency relative to the rest of the world can help boost exports, shrink trade deficits, and reduce the cost of interest payments on outstanding government debts.
Why are fixed exchange rates hard to maintain?
Cons of a Fixed/Pegged Rate
A common element with all fixed or pegged foreign exchange regimes is the need to maintain the fixed exchange rate. This requires large amounts of reserves, as the country's government or central bank is constantly buying or selling the domestic currency.
How does the government keep the exchange rate fixed?
To maintain a desired exchange rate, the central bank during a time of private sector net demand for the foreign currency, sells foreign currency from its reserves and buys back the domestic money. This creates an artificial demand for the domestic money, which increases its exchange rate value.
Why would a government want a floating exchange rate?
The benefits of a floating currency/exchange rate are the lack of a need for large reserves, the lack of need for another commodity the currency would be tied to, the ability to manage inflation, and the ability to pursue internal controls, such as full employment.
What are the advantages and disadvantages of fixed exchange rates quizlet?
Fixed exchange rates reduce foreign exchange risk for companies with cross border trade. The major disadvantage of fixed exchange rate system is that it establishes a direct link between domestic and foreign inflation and employment.
What is most likely to cause a rise in a country's exchange rate?
Higher interest rates can increase a currency's value. They can attract more overseas investment, which means more money coming into a country and higher demand for the currency.
Why might consumers prefer a strong exchange rate?
Americans using U.S. dollars can see those dollars go further abroad, affording them a greater degree of buying power overseas. Because local prices in foreign countries are not significantly influenced by changes in the U.S. economy, a strong dollar can buy more goods when converted to the local currency.
What is an example of a fixed exchange rate?
For example, the United Arab Emirates pegs its currency, the UAE dirham, to 0.27 United States dollar. In other words, for 1 USD, you will always get 3.67 dirhams. It was done to provide stability in the oil trade between the two countries.
What are the two types of fixed exchange rates?
The two major types of fixed exchange rate regimes were the gold standard and Bretton Woods. The gold standard relied on retail convertibility of gold, while the BWS relied on central bank management where the USD stood as a sort of substitute for gold.
How is the value of a fixed exchange rate determined in Quizlet?
Fixed: A fixed exchange rate has a value determined by the government compared to other currencies. In a fixed exchange rate system, the supply of the currency can be manipulated by the central bank, which can buy or sell the currency to change the price to where they want.
