Exchange Rate Systems

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    kirstyharrison
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    Dear Tutor,

    In the Kaplan book, exchange rate systems are mentioned, however the book makes no sense to me.

    According to Kaplan book there are 3 exchange rate systems:
    FIXED EXCHANGE RATES(Fixed against a single currency or fixed against a basket of currencies)
    FREELY FLOATING EXCHANGE RATES
    MANAGED FLOATING EXCHANGE RATES

    Can you please help?

    Thanks
    Kirsty


    Avatar of John Moffat
    John Moffat
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    Fixed exchange rates are when the currency of a country is fixed against another currency. For example, the currency in Latvia has a fixed exchange rate against the Euro. The government decided to have this fixed rate, and as a result as the Euro goes up and down against the US Dollar, the Latvian currency automatically goes up and down against the US dollar as well. They want this because most of their trade is with countries in the Euro zone and so they do not have the risk there would be if the exchange rate against the Euro kept changing.

    Most countries have floating exchange rates which means that the exchange rate changes from day to day depending on demand for the currency. The UK has a floating exchange rate and so the rates against the Euro and against the US dollar keep changing.

    Managed floating exchange rates mean that the currency is allowed to move (like floating exchange rates) but the government of the country sets limits and stops the exchange rate moving too much.

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