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Disadvantages of Fixed Rates
If currency has been fixed at too high an exchange
rate then exports will fall and imports rise (subject
to Marshall Lerner condition) leading to worsening
BofP current a/c balance
Central Bank (eg bank of England) has to maintain
large reserves of foreign exchange and/or gold to
intervene in the market to keep currency in fixed
range…read more

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Disadvantages of Fixed Rates (continued)
Potential for conflicting policies eg high interest
rates needed to support currency while low
interest rates needed to help economy in
recession
Risk of massive currency speculation (eg UK, Black
Wednesday, 16 Sep 1992)…read more

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Advantages of Floating Rates
No need to maintain large gold and foreign exchange
reserves to manage the currency.
Avoids massive currency speculation with just day-
to-day movements.
Automatically adjusts to correct BofP current account
deficits or surpluses (ceteris paribus!!)
No monetary policy conflicts.…read more

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Disadvantages of Floating Rates
Lack of certainty for exporting and importing
businesses when costing business deals.
Lack of certainty for tourists when costing overseas
holiday plans.
No incentive to adopt best practice production
methods to improve efficiency (productivity) as
automatic adjustment of currency prices (exchange
rates) to correct trade surpluses / deficits…read more

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Advantages of Euro
Provides certainty for exporting and importing
businesses when costing business deals within the
Euro Zone and thus increases trade.
Provides certainty for tourists when costing
overseas holiday plans within the Euro Zone and
thus increases tourism within the EU (but at
expense of non Euro zone tourists?)
Provides an incentive to adopt best practice
production methods to improve efficiency
(productivity) as no automatic adjustment of
currency prices (exchange rates) to correct trade
surpluses / deficits within the Euro Zone…read more

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