Difference between Fixed and Flexible Exchange Rate

There are various types of exchange rates that are prevalent in the market, but the most commonly used exchange rate systems are fixed exchange rate and flexible exchange rate systems.

Fixed exchange rate system is referred to as the exchange system where the exchange rate is fixed by the government or any monetary authority. It is not determined by the market forces.

Flexible exchange rate system is the exchange system where the exchange rate is dependent upon the supply and demand of money in the market.

In a flexible exchange rate system, the value of the currency is allowed to fluctuate freely as per the changes in the demand and supply of the foreign exchange.

Let us look at some of the points of difference between the fixed and flexible exchange rates

Fixed Rate

Flexible Exchange Rate

Definition

Fixed rate is the system where the government decides the exchange rate

Flexible exchange rate is the system which is dependent on the demand and supply of the currency in the market

Deciding authority

Fixed rate is determined by the central government

Flexible rate is determined by demand and supply forces

Impact on Currency

Currency is devalued and if any changes take place in the currency, it is revalued.

Currency appreciates and depreciates in a flexible exchange rate

Involvement of Government Bank

Government bank determines the rate of exchange

No such involvement of government bank

Need for maintaining foreign reserve

Foreign reserves need to be maintained

No need for maintaining foreign reserve

Impact on BOP (Balance of Payment)

Can cause deficit in BOP that cannot be adjusted

Deficit or surplus in BOP is automatically corrected

This article was all about the topic of Difference between Fixed and Flexible Exchange Rate, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

Leave a Comment

Your Mobile number and Email id will not be published. Required fields are marked *

*

*