Discussion Reply- Response 1-2 paragraphs with 2-3 references APA format

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Hello,I hope you are fine. I have gone through your post, and I must state that I am

impressed by it. Before delving into the pros and cons of the floating and fixed exchange rate

systems, one must understand their meaning. It is true that when a country ties the value of its

currency to the widely used currency or commodity, it is referred to as a fixed exchange rate.

The United States of America dollar is commonly used as a trading currency in the international

set up. Therefore, that is the basic reason most countries use it to set their exchange rates.

Besides, countries can also fix rates to those countries they trade with mostly where by the

government can set a fixed exchange rate either partially or completely. Fixed exchange rate

systems we recommend during the first half of the 20th century. Governments strongly favored

them since it was mistakenly believed that they offered three key advantages. First, they would

reduce the risk of speculative capital flows that could destabilize the economy. Second, they

could introduce greater discipline in national policies to avoid inflation. Thirdly, they would

eliminate the risk of the exchange rate and, therefore, promote international trade.

On1the1other1hand,1the1floating1system1involves1governments1setting1rates1of1their

1currency1based1on1demand1and1supply1of1their1currency1relative1to1others.1This1means1t

hat1the1currency1rates1are1set1based1on1the1forces1of1the1open1market1under1the1laws1of

1demand1and1supply.1However,1I1agree1with1you1that1that1sets1the1exchange1rates1using1

the1floating1system1can1be1manipulative1because1the1central1bank1and1the1government1wil

l1work1diligently1so1that1they1keep1their1currency1competitive1in1the1international1trade.1

In1your1post1about1the1advantages1of1a1fixed1rate,1I1think1you1should1have1stated

1that1the1fixed1exchange1rate1system1has1more1disciplined1economic1policies.1In1a1fixed1

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exchange1rate1system,1high1inflation1in1a1country1causes1foreign1buyers1to1pay1a1higher1

price1for1that1country's1exports.1It1also1makes1the1country's1import1sector1less1competitive

.1Exports1weaken1and1imports1strengthen.1These1twin1pressures1worsen1the1balance1of1pa

yment1positions1as1the1economy1becomes1less1competitive1concerning1foreign1countries,1

which1leads1to1unemployment.1It1was1thought1that1these1forces1would1pressure1governme

nts1to1implement1anti-inflationary1policies.

In1addition,1a1fixed1exchange1rate1eliminates1the1exchange1rate1risk.1It1was1though

t1that1the1absence1of1this1risk1benefited1international1trade1and1capital1flows.1Also,1it1is1t

hought1that1speculation1inevitably1created1unviable1volatility1and1destabilized1a1flexible1or

1free-floating1exchange1rate.1This1would1be1detrimental1to1small1economies1that1depended

1on1a1high1level1of1international1trade.

Contrastingly,1its1disadvantage1is1that1a1fixed1exchange1rate1does1not1automatically

1correct1an1unbalanced1balance1of1payments.1A1fixed1system1forces1a1government1to1corr

ect1the1imbalance1by1increasing1interest1rates1and1reducing1domestic1demand.1This1does1

not1allow1internal1economic1policies1to1focus1on1unemployment1and1inflation.1On1the1con

trary,1a1floating1exchange1rate1releases1internal1policy,1and1the1currency1is1automatically1

devalued1to1correct1the1external1imbalance.1Furthermore,1fixed1rates1do1not1automatically1

harmonize1the1different1national1economic1policies1that1differ1between1countries.1For1exa

mple,1high1inflation1countries1will1be1less1competitive1compared1to1low1inflation1countrie

s.1This creates1speculation1of1a1devaluation,1putting1pressure1on1the1government1to

devalue.

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References

Buffie,1E.1F.,1Airaudo,1M.,1&1Zanna,1F.1(2018).1Inflation1targeting1and1exchange1rate1ma

nagement1in1less1developed1countries.1Journal1of1International1Money1and1Finance,

181,1159-184.

Martin,1F.1E.1(2016).1Exchange1rate1regimes1and1current1account1adjustment:1An1empirica

l1investigation.1Journal1of1international1Money1and1Finance,165,169-93.

Qureshi,1M.1S.,1&1Tsangarides,1C.1G.1(2015).1Exchange-rate1regimes1and1trade:1is1Africa

1different?1In1Growth1and1Institutions1in1African1Development1(pp.181-106).1Routl

edge.