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Disadvantages. A fixed exchange rate can be expensive to maintain. A country must have enough foreign exchange reserves to manage its currency's value. A fixed exchange rate can make a country's currency a target for speculators.
As with a hard peg, the drawback of a fixed exchange rate compared to floating exchange rates is that the government has less scope to use monetary and fiscal policy to promote domestic economic stability.
The idea of fixed exchange rates is that they reduce uncertainty over fluctuations in the currency; this gives greater confidence for firms to invest (especially exporters).
The main economic advantages of floating exchange rates are that they leave the monetary and fiscal authorities free to pursue internal goals such as full employment, stable growth, and price stability and exchange rate adjustment often works as an automatic stabilizer to promote those goals.
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold.
Fixed exchange-rates are not permitted to fluctuate freely or respond to daily changes in demand and supply. The government fixes the exchange value of the currency. For example, the European Central Bank (ECB) may fix its exchange rate at 1 = $1 (assuming that the euro follows the fixed exchange-rate).
A fixed exchange rate is a regime applied by a government or central bank ties the country's currency official exchange rate to another country's currency or the price of gold. The purpose of a fixed exchange rate system is to keep a currency's value within a narrowband.
A fixed exchange rate is when a country ties the value of its currency to some other widely-used commodity or currency. ... Today, most fixed exchange rates are pegged to the U.S. dollar. Countries also fix their currencies to that of their most frequent trading partners.
A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen, or a basket of currencies).
A central bank maintains a fixed exchange rate by buying or selling its currency. If the domestic currency appreciates then the central bank will intervene and sell its reserves of domestic currency in order to reduce the value of the domestic currency by increasing its supply in the forex market.
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