Economics Exchange Rate Systems Questions
A flexible exchange rate regime is a system where the value of a country's currency is determined by market forces, such as supply and demand. The exchange rate fluctuates freely and can be influenced by various factors, including economic conditions, interest rates, and investor sentiment. In this regime, the government does not intervene significantly in the foreign exchange market.
On the other hand, a rigid exchange rate regime, also known as a fixed or pegged exchange rate regime, is a system where the value of a country's currency is fixed or pegged to another currency, a basket of currencies, or a commodity. The government or central bank actively intervenes in the foreign exchange market to maintain the fixed exchange rate. This can involve buying or selling foreign currencies to stabilize the exchange rate and ensure it remains within a predetermined range.
In summary, the main difference between a flexible and a rigid exchange rate regime lies in the level of government intervention and the degree of exchange rate flexibility. A flexible regime allows the exchange rate to fluctuate freely based on market forces, while a rigid regime fixes the exchange rate and requires government intervention to maintain its stability.