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The choice between fixed and flexible exchange rate systems has remained one of the most debated issues in international trade and finance. Each system has its own merits and demerits, and their suitability depends largely on the economic conditions, policy objectives, and the structural characteristics of a country. Fixed exchange rates imply that the value of a currency is tied to another currency or a basket of currencies, while flexible exchange rates allow the value of a currency to fluctuate according to market forces of demand and supply. A critical examination of both systems helps in understanding which might be more beneficial for a developing country like India. One of the primary merits of a fixed exchange rate system is the stability it provides in international trade. By pegging the domestic currency to a major currency such as the U.S. dollar, the risks of currency fluctuations in trade are minimized. This stability fosters investor confidence and encourages foreign direct investment, as investors can predict returns without worrying about sudden exchange rate volatility. Additionally, fixed exchange rates act ___ ______ _____ __________ _____ ______ _________ _________ ___ _____ ______.
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