Question

Long Answer Type Questions :
Distinguish between the fixed exchange rate and the floating exchange rate. If exchange rate falls, explain its effects on exports and imports.

Answer 1

Fixed rate of exchange refers to the rate of exchange as fixed by the government. Historically, it has two variants; Gold standard system of exchange rate and Bretton woods system of exchange rate.

Flexible or floating rate of exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.

When the exchange rate falls, imports rise since import is a component of the dmand of foreign exchange and exports fall as export is a component of the supply of foreign exchange.