Critically examine the relative merits and demerits of the fixed and flexible exchange rates.

Merits of Fixed and fexible exchange Rates System are :

Merits

1. Exchange Rate Stability: - Exchange rate stability, it is said, to be  necessary for orderly devel­opment of the international economy and rapid growth of world trade. If the exchange rate is un­stable or variable, the exporters will not be certain about the price they would receive for the goods to be exported by them; the importers will not be certain about the price and the payments they have to make for their imports.These uncertainties involve risks for exporters and importers. This greatly harms the growth of world trade. Thus, the chief merit of fixed exchange rate system is that it eliminates the possibilities of such uncertainties and associated risks and thereby promotes foreign trade.It is important to note that for the developing countries a stable or fixed exchange rate system has a special advantage. This is because the developing countries have a large and persistent balance of payment deficits.As a consequence, if the exchange rate is flexible and not fixed, due to these large persistent deficits, the exchange rate or international value of their currencies will be continu­ously falling. Thus fixed exchange rate system prevents this continuous tendency for the deprecia­tion of their currencies.

2. Promotes Capital Movements: - Another advantage of fixed exchange rate is that it facilitates capital movement by private firms. A stable currency does not involve any uncertainties about capi­tal loss on account of changes in exchange rate. Therefore, fixed exchange rate system would attract foreign capital investments.Foreign private firms would not be interested in making investment in those countries whose currency is not stable. _______ _____ ____ ____ _____ _________ _____ ________.
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