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Question

Discuss some of the exchange rate arrangements that countries have entered into the bring about stability in their external accounts. 


Solution

Exchange rate expresses the ratio of exchange betw een tne currencies of two countries. 

Mostly three exchange rate used to temp about  stabi lity in their externs accounts by countries.

1. Fixed Exchanged Rate The exchange rate that is official rued and declared by the government.

There are two kinds ce fixed exchange rate

(i) Gold Standard System : As per this system gold w as taken as the common unit of panty between curren cies of deferent countries el the circulation. Each cou ntry was to define value of its currency in tens of the other currency was fixed ccnsidering gold value of each currency.

(ii) The Bretton Woods System : As per this system all anemias were pegged or related to US dollar at a fixed exchange rate. This system gave birth to interna tional and monetary fund as the central institution in the interrationsi monetary system.

2. Flexible Exchange : Rate The exchange rate which is dammed Of the forces of demand and supply of different and affianced in the foreign exchange market.

It is a Debbie rate because the value of currency is alloyed to fluctuate according to change in demand and supply d blegn exchange.

3. Managed fleeting Rats System : The system in whi ch the central bank allows the exchange rate to be determined by market it)reeswbj intervene at times to influence the rate For this, central bank maintains reserves of foreign exchange to ensure that the excin rate stays with in the targeted value. 

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