Distinguish between fixed exchange rate system and flexible exchange rate system.

Question

Accepted Answer

**Distinguishing between Fixed Exchange Rate System and Flexible Exchange Rate System:**

| Basis | Fixed Exchange Rate | Flexible Exchange Rate |
|-------|--------------------|-----------------------|
| **Determination** | Officially fixed by the government in terms of gold or another currency | Determined by forces of demand and supply in the market |
| **Government Control** | Complete government control; only government can change it | No government intervention; fluctuates freely |
| **Stability** | Generally remains stable with small variations | Keeps changing frequently |
| **Foreign Exchange Reserves** | Government must maintain large reserves | Not required as rate is market-determined |
| **Currency Value Change** | Leads to Devaluation (decrease) or Revaluation (increase) by government | Leads to Depreciation (decrease) or Appreciation (increase) by market forces |
| **Speculation** | Prevents speculative activities | Susceptible to speculative activities |