Free Floating exchange rate

An exchange rate that is determined by the market forces of demand and supply.

  • Created by: Elliott
  • Created on: 30-05-13 13:52

Free Floating exchange rate


  • Exchange rate is not a constraint of macro economic policy. This allows the interest to changed in order to achieve macroeconomic objectives.
  • Makes monetary policy more effective. For example, changing the IR will reduce AD through both consumption and a fall in X-M.
  • BoP problems are corrected automatically. As Exchange rate falls it becomes easier to export again.
  • Helps the economy deal with external shocks.EG, global recession = EXR down as demand for imports is lower. As this falls exports may recover
  • No pressure of speculative attacks as EXR won't become under vauled.


  • Self correction- EG when exports are high EXR will increase
  • Depreciation =imported inflation. + reduction in purchasing power of households.
  • Depreciation in the short run may not be noticed and therefore costs more. because of, Fixed term contracts, availability of subs, imperfect information.



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