Differentiating between a flexible exchange rate system and a fixed exchange rate system.
Concept introduction:
Flexible exchange rate system:
It is also known as floating exchange rate system. It is a monetary system that permits the exchange rate to be determined by the forex market through supply and demand. Under this regime, most of the world’s major currencies are allowed to float, following the collapse of the Bretton Woods Agreement.
Fixed exchange rate system:
It is sometimes referred to as pegged exchange rate, because a currency’s value is fixed against either the value of another currency or to a basket of other currencies. Under this system, the central bank ties the official exchange rate to another country’s currency or to a price of gold.
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