A fixed exchange rate is a rate the government sets and maintains as the official exchange rate. A set price will be determined against a major world currency. In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.
A floating exchange rate is determined by the private market through supply and demand. It is often termed "self-correcting,"
as
any differences in supply and demand will automatically be corrected
in the market. As see, if demand for a
currency is low, its
value will
decrease,
thus making imported
goods more expensive and stimulating demand for local goods and services.
|
Sl. |
Fixed exchange rate |
Floating exchange rate |
|
1 |
A nominal
exchange
rate that is set
firmly by the local monetary authority |
Determined by the private market through supply and demand as self- corrected |
|
2 |
Imposed by a local
official exchange
rate system |
Imposed by rate
of foreign
exchange
markets |
|
3 |
Rate is stable in general |
Rate fluctuates constantly |
|
4 |
The main economic advantage is that
they
promote international trade and investment |
The economic main advantage
is that they leave the
monetary
and fiscal authorities free to pursue internal goals |
|
5 |
The main disadvantage is that it discourage to international trade and
investment due
to nominal
exchange
rate system |
The main disadvantage is encourage more
to
international trade and
investment due
to autonomous monetary system |