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

\[ \begin{array}{|c|c|} \hline \textbf{Fixed Exchange Rate System} & \textbf{Flexible Exchange Rate System} \\ \hline \text{It ensures stability in foreign trade and investments.} & \text{It fluctuates, causing uncertainty in trade and investments.} \\ \hline \text{Central banks intervene to maintain the pegged rate.} & \text{There is minimal or no intervention by central banks.} \\ \hline \end{array} \]