ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A great merit of flexible exchange rates is that it frees the Government from problems of balance of payments. As has been seen above, the fixed exchange rates system leads either to deficit or surplus in balance of payments.

Detailed explanation-2: -Flexible exchange rates have the advantage that they allow a country to pursue an independent monetary policy, rather than have its own monetary policy set by an anchor currency country.

Detailed explanation-3: -Advantages of Fixed Exchange Rate System It ensures stability in foreign exchange that encourages foreign trade. There is a stability in the value of currency which protects it from market fluctuations. It promotes foreign investment for the country. It helps in maintaining stable inflation rates in an economy.

Detailed explanation-4: -ADVERTISEMENTS: These uncertainties involve risks for exporters and importers. This greatly harms the growth of world trade. Thus, the chief merit of fixed exchange rate system is that it eliminates the possibilities of such uncertainties and associated risks and thereby promotes foreign trade.

Detailed explanation-5: -There are pros and cons to using a fixed exchange rate. The pros are that it eliminates market volatility and gives stability to financial markets. The cons are that it can lead to increased inflation and decreased competitiveness.