(Mt) – MGT 321 SEU Governments Enforce Exchange Rates Discussion

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Answer 1 Fixed exchange rates are policies enforced by governments or central banks that connect the official currency exchange rate to another currency or gold’s market value. Restricting the range of possible exchange rate changes helps keep a currency’s value steady (Plantin & Shin 2018). In a country that uses a floating exchange system, the currency’s value is affected by the demand and supply of other currencies in the forex market. A fixed exchange rate helps promote international trade and investment by reducing exchange rate risk. As a result, it may have a lower impact on commerce and investment than a currency board, which is more permanent. In the long run, especially for developing countries, fixed exchange rates can be a significant source of economic growth since they encourage international commerce and investment (Plantin & Shin 2018). Exporters and importers alike benefit from the predictability that fixed rates provide. Low inflation helps the government maintain low-interest rates and encourages commerce and investment in the long run. A currency’s value fluctuates when it is exchanged between different currencies. Weaker currencies make it more expensive for overseas customers to import goods which boosts exports. A strong or weak currency might cause a trade deficit or surplus. The fixed rate system is thus unsuitable for international trade. The external price of a currency under a floating exchange rate system can be modified to fix the balance of payments imbalance. A fixed exchange rate policy could lead to an overall deflationary policy for the economy, resulting in unemployment and idle capacity. When currencies are allowed to fluctuate freely, the risk of a worldwide monetary crisis is eliminated (Nakatani 2018). It is, therefore, the best system for international business. Even though a free-floating currency regime has its drawbacks, it is a more effective way to determine the long-term value while also maintaining global economic balance. References Nakatani, R. (2018). Real and financial shocks, exchange rate regimes and the probability of a currency crisis. Journal of Policy Modeling, 40(1), 60-73. Plantin, G., & Shin, H. S. (2018). Exchange rates and monetary spillovers. Theoretical Economics, 13(2), 637-666. Answer 2 Foreign exchange regimes refer to the strategies that governments apply to manage their currencies in the foreign exchange markets. The government may apply various regimes such as fixed and floating exchange rates when managing their foreign markers. These exchange rate regimes may vary based on the monetary policy employed in a country (Khan, 2019). Therefore, some regimes may be perceived to be better than others. This paper will focus on discussing how a floating exchange rate regime is better than a fixed exchange rate regime. Tsaih et al. (2018) indicate that a floating exchange rate regime is advantageous since it gives the fiscal and monetary authorities a mandate to manage their internal affairs, such as full employment, price stability, and economic growth. The floating exchange rate regime helps monetary and fiscal authorities to handle their affairs diligently since market forces guide it. This means that the floating exchange rate regime corrects the disequilibrium in the balance of payment through the market forces. Another advantage of floating over a fixed exchange rate regime is reducing the emergence of inflation. Tsaih et al. (2018) stated that when a country uses a floating exchange rate regime, it reduces its chances of experiencing imported inflation. Imported inflation would occur when a country imports goods from another nation that are of higher prices. Moreover, through a floating exchange rate, a country would avoid importing inflation from deficit countries when it has a payment surplus. A floating exchange rate regime is also advantageous over a fixed exchange rate regime since it lowers the amount a country requires to maintain its reserve. Lowering a country’s reserve occurs since the country requires fewer funds under a floating exchange rate to solve the balance of payment disequilibrium (Khan, 2019). This is contrary to the fixed exchange rate regime where the government, through its central bank, had to keep the fund in reserve to help it solve balance of payment disequilibrium. Lastly, a floating exchange rate regime is advantageous over a fixed exchange rate regime since it helps countries avoid a crisis. A floating exchange rate regime crisis would be avoided since market forces will correct the disequilibrium experienced (Khan, 2019). This is unlike in the fixed exchange rate regime, where a country’s central bank is required to either devalue or revalue its currency when handling a crisis. References Khan, M. K. (2019). Impact of exchange rate on stock returns in Shenzhen stock exchange: Analysis through ARDL approach. International Journal of economics and management, 1(2), 15-26. Tsaih, R. H., Kuo, B. S., Lin, T. H., & Hsu, C. C. (2018). The use of big data analytics to predict the foreign exchange rate based on public media: A machine-learning experiment. It Professional, 20(2), 34-41.

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