Question

Short Answer Type Questions:
What are fixed and flexible exchange rates?

Answer 1

A fixed exchange rate is a rate which is maintained and controlled by the central government. Under this system, the value of currency is fixed against different currencies to ensure stability in exchange rate and promote foreign trade.

A Flexible exchange rate is a rate which is determined by the market force. It is controlled by demand and supply forces, which is why it is called as free rate of exchange. There is a minimum or no government intervention, and the government does not hold any reserves. There is no problem of overvaluation or undervaluation of currency.