Free Floating exchange rate


	Free Floating exchange rate
	Advantages 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.	Disadvantages 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.
	Evaluation

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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