In which situation is a country most likely to choose a fixed exchange rate? (2024)

In which situation is a country most likely to choose a fixed exchange rate?

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.

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.

What countries use fixed exchange rate?

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 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.

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 are two advantages of fixed exchange rate?

Advantages of Fixed Exchange Rate System

It ensures stability in foreign exchange that encourages foreign trade. There is a stability in the value of currency which protects it from market fluctuations. It promotes foreign investment for the country. It helps in maintaining stable inflation rates in an economy.

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.

Why is fixed exchange rate better than floating?

A fixed exchange rate regime reduces the transaction costs implied by exchange rate uncertainty, which might discourage international trade and investment, and provides a credible anchor for low-inflationary monetary policy.

How is the fixed exchange rate determined?

Fixed Exchange Rate

The central banks will need to sell or purchase currency reserves if the foreign exchange market moves significantly. For instance, the government could decide to "fix" the exchange rate at Rs. 75, while the actual economic and foreign exchange market conditions might only allow for Rs. 70.

What country has the best exchange rate?

The highest currency in the world is none other than Kuwaiti Dinar or KWD. Initially, one Kuwaiti dinar was worth one pound sterling when the Kuwaiti dinar was introduced in 1960. The currency code for Kuwaiti Dinar is KWD.

Does the US use a fixed exchange rate?

Managed Floating Exchange Rate

This type is similar to a free floating exchange rate, but a government intervenes by buying or selling its own currency to minimize fluctuations. Australia, Canada, Jamaica, Japan, the Philippines, the United States, and others adopted this type of exchange rate.

What is fixed exchange rate answer?

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. A fixed exchange rate system has the aim of keeping the value of a currency within a narrow band.

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.

What is an example of a strong exchange rate?

A strong dollar is an exchange rate that is historically high relative to another currency. For example, if the exchange rate between the U.S. and Canada hovered between 0.70 CAD/USD and 0.83 CAD/USD during the five years that ended in late December 2023.

What is a fixed exchange rate currency crisis?

A currency crisis is a sudden and unexpected rapid decrease in the value of a currency. Currency crises are particularly severe in the case of a fixed exchange rate. because such crises typically force a monetary authority to abandon the fixed rate.

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.

How is the value of a fixed exchange rate determined 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.

In which two ways does imposing a fixed exchange rate affect countries?

A fixed exchange rate regime imposes discipline in two ways. First, the need to maintain a fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment. Second, a fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation.

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.

Which of the following describes the fixed exchange rate system?

A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold.

What is fixed exchange rate advantages and disadvantages?

The merits have been stated below. Price Stability: Fixed exchange rates provide price stability, making it easier for businesses to plan and budget for international trade. Reduced Currency Risk: Businesses and investors can hedge against currency risk more effectively in a fixed exchange rate system.

What is the advantage and disadvantage of fixed exchange?

Why do fixed exchange rates fail?

If there are lots of imports or exports, the 'price' of the currency does not change. This means fixed exchange rates fail to adjust for changes in competitiveness over time.

What is one disadvantage of a fixed exchange rate system?

The major disadvantage of fixed exchange rate system is that it establishes a direct link between domestic and foreign inflation and employment. The second problem is the difficulty of sustaining fixed exchange artes when they diverge from market rates.