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Social Science Clinic => Economics => Topic started by: mp14 on May 25, 2020

Title: Give two advantages of free-floating exchange rates.
Post by: mp14 on May 25, 2020

Question 1

Give two disadvantages of fixed exchange rates.

Question 2

Give two advantages of free-floating exchange rates.

Title: Give two advantages of free-floating exchange rates.
Post by: javimendoza7 on May 25, 2020

Answer 1

1) Balance of payments deficits can lead to a depression.
2) Competitive deflation may lead to a world depression.
3) There may be problems of international liquidity.
4) Inability to adjust to shocks.
5) Risks of speculation if it is thought that the fixed exchange rate may have to be abandoned.

Answer 2

Advantages include:
1) Automatic correction of external disequilibria.
2) Elimination of the need for reserves.
3) Governments have a greater independence to pursue their chosen domestic policy.