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Topic 22 Arguments against flexible exchange rates include the arguments that they cause uncertainty, they inhibit international trade and that they allow destabilizing speculation. Arguments against fixed rates include that they cause uncertainty, they inhibit international trade and they allow destabilizing speculation. Contrast the situation in one country with a fixed exchange rate with one country that has a floating rate and explain the impact of the fixed and floating rates. Introduction Prior to 1970, fixed, or say pegged exchange rate regime was adopted by almost all countries worldwide. Afterwards, some countries have gradually made the transition from fixed to flexible exchange rates, which allow currency to float …show more content…

This gives pressure on Australia’s exchange rate. This factor will help to explain why the exchange rate has not been completely varied according to the changes in terms of trade. * Purchasing Power Parity PPP is about the money needed to purchase the same goods and services in two countries, which can be used to calculate foreign exchange rate. If the inflation level in one country is higher than that of its trading partner, the countries will face a deduction in demand of exports and an increase in demand of imports, causing a depreciation for that particular currency. Applying to Australia, it is the same situation. From beginning to mid 2011, the inflation level in Australia was relatively high, causing a drop of AUD/USD in the following month. From the beginning of 2012, AUD has experience an appreciation against USD, indicating the inflation level in Australia becomes lower. (RBA, 2010) There are many other factors influence the foreign exchange rate in a floating regime, for instance, expected interest rate parity and speculation, etc. Though Australia is using floating foreign exchange rate regime, the market will still experience occasional interventions from the RBA. The government believes that it cannot always rely on the market force to create a true and fair market. When RBA intervenes, it sells and buys Australian dollar against another currency, generally the US dollar, to

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