question_answer

What are fixed and flexible exchange rates?

Or

Explain the meaning of Managed Floating Exchange Rate.

Answer:

Fixed exchange rate refers to a system where the exchange rate is held constant or fixed by the monetary authority of the country. Under this regime, the monetary authority of the country pegs (or, fixes) the value of its currency against various other currencies. This system of exchange rate avoids frequent fluctuations in the exchange rate and makes international trade more predictable.

On the other hand, a flexible exchange rate refers to a system where the exchange rate is determined by the market forces (demand for foreign exchange and supply of foreign exchange) with minimum or no government intervention. The equilibrium exchange rate is determined where the demand for foreign currency is equal to the supply of foreign currency.

Or

Managed floating system of exchange rate combines the features of both the fixed exchange rate as well as the flexible exchange rate. On one hand, the foreign exchange market is allowed to operate freely and on the other hand, there is an official declaration of rules or guidelines for the intervention by the monetary authority. In other words, the managed floating exchange rate regime determines the exchange rate through the market forces with intervention of the monetary authority as and when required.