Intermediate Macroeconomics Essay Example | Topics and Well Written Essays - 1500 words

middling Macroeconomics - Essay ExampleIt happens because of increase in import prices and fall in incentives to cut costs. Hence, a wintry exchange number would benefit a nation to keep its inflation low and thereby campaign its economic growth. As Frankel (1995, p. 40) points out, stubborn exchange can be considered as an effective monetary form _or_ system of g all overnment for assuring price stability. Similarly, maintaining fixed exchange rate may be an effective strategy to prohibit speculation in foreign currency transactions and thereby stabilise the economies. It must be observe that the exchange rate does not remain permanently frozen under the fixed exchange rate system. Rather the exchange rate is timely and appropriately resent so as to ensure fundamental frequency equilibrium in the balance of payments. Disadvantages of fixed exchange rates Even though a fixed exchange rate may be beneficial to promote certainty of future exchange rates, this conception has m any injurys. Primarily, a fixed exchange rate would cause conflict with other macroeconomic objectives. setting fixed exchange rate may reduce financial transactions flexibility and hence an frugality may face potential difficulties in responding to temporary shocks. Economists opine that fixed exchange rates may lead to current account imbalances. Proper setting of fixed exchange rate would be a difficult task for regulators because the exchange rate is most likely to impact the economic growth of a country. Varying exchange rates raises potential challenges to multinational corporations engaged in international trade. According to Jainist and Ohri (n.d, p. 265), the fixed exchange rate system is to be supported with large international reserves and the compose finds it as one of the principal demerits of this system. They continue that a... This essay approves that currency rate fluctuation is one of the gruelling consequences of maintaining a floating exchange rate regime. Evidences suggest that frequent currency fluctuations in the global financial market may cause pregnant problems to bulletproofs engaged in international trade. To illustrate, when a British firm is exporting commodities to its US client, a sudden appreciation in sterling would probably make the British firms exports uncompetitive and hence the organisation may go out of the business. Similarly, unexpected and significant exchange rate fluctuations may sometimes force a multinational corporation to pay higher(prenominal) costs for its imports and this situation in turn would increase the firms vulnerability to bankruptcy. The most argued disadvantage of floating exchange rate is that it significantly weakens internal price discipline and allows greater level of inflation. This enshroud makes a conclusion that from the above discussion, it is clear that either fixed exchange rate system or floating exchange rate system does not have any competitive edge over the other. Each syste m has its own advantages and disadvantages. Hence, regulators must consider their growth priorities while choosing an exchange rate policy. For scurvy nations and developing economies, fixed exchange rate system is more advisable as this policy would bring up their smooth economic development. On the contrary, a flexible exchange rate system may precaution developed countries to promote their growth in international market.