'Advantages and Disadvantages of High and Low Exchange Rates of a Fixed and Floating Exchange Rate System Essay\r'

'1. An modify position is the intake of one notes expressed in terms of another. If the U.S. alternate valuate for the Canadian Dollar is $1.60, this heart and soul that 1 American Dollar can be swopd for 1.6 Canadian dollars.\r\nWith a elevated reciprocation count, in that respect ar many advantages: Imports manufacture comparatively cheaper. For prototype the unlawful for substanceed raw materials becomes cheaper; the toll of production for firms becomes less. This could lead to decreased prices for consumers. The miserableer-rankinger price of imported impregnables similarly puts force on domestic help firms to corrobo ramble prices low. All this leads to a d avowward pressure of inflation. Further more, more imports can be bought. A high exchange rate means that for each social unit of the currency, more units in unconnected currencies can be bought. therefore there entrusting be more visible imports, much(prenominal)(prenominal) as technolo gy, and invisible imports, such as external travel. Moreover, a high honour of currency forces domestic producers to more efficiency as they forget try to re principal(prenominal) their free-enterprise(a)ness. This would lead to great stinting productivity of the country.\r\nYet, a result king also be the laying-off of workers. As visible, there are also disadvantages to a high exchange rate. exportation industries cleverness be damaged. Domestic companies will note it hard to sell their products abroad due to their comparatively high prices, which could lead to un purpose in these industries. There also faculty be damage to domestic industries. As it is cheap for households to consume products from abroad, domestic industries baron set out care that the read, defined as the quantity of goods and services that consumers are willing, and able to buy at each accomplishable price over a given cadence period, for domestic product falls. A result of this might be further increase in the direct of unemployment, defined as the people of working age, those in the labour force, actively seeking work at the current wage rate hardly cannot ascertain one, as firms cut back.\r\nPossible advantages of a low exchange rate involve the greater employment in export industries as exports become relatively less expensive. Furthermore, domestic companies might experience greater employment as the low exchange might encourage consumers to spend more on domestic goods and services, rather than importing goods and services. This might also lecture employment. A possible disadvantage of a low exchange rate is inflation, defined as the uphold increase in the general or sightly level of prices. Imported final goods and services, raw materials and components become more expensive. The cost of production for firms will rise, leadership to a boost prices for the final products.\r\nTo sum up, a high exchange rate may be a good fight against inflation, barely unempl oyment could be created, whereas a low re pry of a currency may be good for solving unemployment problems, but may create inflationary pressure.\r\n2. A set exchange rate is an exchange rate regime where the value of a currency is amend to the value of another currency, to the average value of a woof of currencies, or to the value of some other commodity, such as gold. Usually the central bank or government decide upon and maintain the value of the currency.\r\nThe Barbadian Dollar has been fixed against the US dollar at a rate of 2Bds$ = 1 US$ since 1975. When there is an increase in show, defined as the willingness and efficacy of products to produce a quantity of a good at a given price in a given time period, for Barbadian dollar, for example due to the Barbadians purchasing a greater inwardness of imports, the supply curve shifts from S1 to S2. There is excess supply of Barbadian dollars from Q2 †Q1. Without intervention by the government, the exchange rate would fa ll, leading to inflationary problems. The government will consequently buy up the excess supply of its own currency on the foreign exchange market. This shifts the command curve from D1 to D2. This is possible due to previously amassed militia of foreign currencies.\r\nAn advantage of such a fixed exchange system is the reduction of uncertainties for all the economic agents in the country. Firms will be able to plan ahead, knowing that the predicted costs and prices for internationalistic trading agreements will not change. Furthermore, fixed exchange order gibe sensible government policies on inflation as inflation has a very harmful mental picture on the posit for exports and imports. The government is forced to take up measures to ensure a low level of inflation. In theory, a fixed exchange rate should also reduce speculation in the foreign exchange markets. Yet, this has not always been the sequel in the past.\r\nDisadvantages of a fixed exchange rate are that the gove rnment is compelled to keep the exchange rate fixed. The main way of doing this is through the manipulation of interest rates. However, if the exchange rate is in danger of falling, then the interest rates have to be increased to raise film for the currency. This will have a deflationary effect on the economy, lowering demand and increase unemployment. Furthermore, high level of reserves need to be maintained to make it clear that it is able to endure its currency by the buying and selling of foreign currencies.\r\nSetting the level of the fixed exchange rate is not simple. If the rate is set at the wrong level, export firms may find a wish of competitiveness in foreign markets. In case of that, the exchange rate needs to be devalued, but again, finding the exact right level is difficult. Furthermore, a country that fixes its exchange rate at an unnaturally low level may create international disagreement. This is because a low exchange rate will make the country’s exports more competitive on world markets and may be seen as an unfair trade advantage. This may lead to economic disputes or to retaliation.\r\nAn advantage of a floating exchange rate is that it does not have to be unbroken at a certain level. Interest rates are free to be employed as domestic monetary tools. It could be used for demand management policies. An example for this would be controlling inflation. To keep the current method of handbilling balanced, the floating exchange rate should adjust itself.\r\nFor example a current account deficit, the demand for the currency is to low since export gross revenue are relatively low. The supply of the currency is high, since the demand for imports is relatively high. As you can see, markets adjust and the exchange rate should fall. Export prices become relatively attractive, import prices relatively less attractive and the current account balance should settle itself. Another advantage is that reserves are not used to control the value of the currency. This makes is unnecessary to keep high levels of foreign currencies and gold.\r\nThere are also disadvantages. Uncertainty tends to be created. plan of businesses tends to be difficult and investments, defined as the expenditure by firms on capital equipment and is an injection into the economy, are hard to assess. The levels of international investment will decrease. Furthermore, in reality, floating exchange rates are bear upon by many factors, not only demand and supply.\r\nAnother factor would be speculation. Therefore they might not adjust themselves and might not make pass current account deficits. Last, a floating exchange rate regime may worsen vivacious levels of inflation. High inflation relative to other countries will make its exports less competitive and imports will be relatively less expensive. Yet, this could lead to even high prices on import goods and services and inflation.\r\n'