What is Fixed and Floating Exchange Rates

 

Fixed Exchange Rates

A fixed exchange rate is one that is set by the government, mainly by the central bank, and maintained as the official exchange rate. This set price is  valued against a key world currency, such as the UK pound, the euro and the yen. Then central bank sells/buys its own currency in foreign exchange (Forex) market against the currency to which it is pegged to maintain the exchange rate. That's why these exchange rates are also known as pegged rates.

The central bank keeps remote trade stores to either implant or retain additional trusts from the business sector to guarantee suitable cash supply in the economy. In spite of the fact that the trade rates are altered by the national bank under this framework, the bank may conform the authority swapping scale as and when it considers fundamental.

Floating Exchange Rates

The floating rate system, the private market determines the values of a currency. This system is also known as flexible exchange rate re, the value of a particular currency is allowed to fluctuate according to the supply/demand  in the foreign exchange rate market. floating rate is constantly changing , as a result, the value of a currency is inherent to this system.

In extreme cases, this system, central bank may intervene in order to provide stability to the currency and investment into the economy of a particular country

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