Some economists believe that, in most cases, fluctuating exchange rates are preferable to fixed exchange rates. Fluctuations in exchange rates automatically adapt to the economic situation and allow a country to mitigate the effects of shocks and foreign economic cycles. At the end of the day, it is the possibility of a balance-of-payments crisis. A fluctuating exchange rate also frees up the country`s monetary policy to pursue other objectives, such as stabilizing employment or domestic prices. Imagine there are two currencies, A and B. On the open market, 2 A can buy a B. The nominal exchange rate would be A/B 2, which means that 2 Aces would buy a B. This exchange rate can also be expressed in B/A 0.5. Real exchange rates are nominal rates that are adjusted for differences in price level. Explain the concept of a foreign exchange market and exchange rate The monetary authority is prepared to buy/sell foreign currency at certain emergency rates in order to maintain the exchange rate at its pre-announced level or range; the exchange rate serves as a nominal anchor or intermediate objective of monetary policy. This type of plan applies to exchange rate plans without a separate legal tender; Currency board agreements; solid pencils with or without ribbons; and creeping pencils with or without ribbons.
The real exchange rate is the nominal exchange rate relative to the relative prices of a basket of goods in both countries. So, in this example, say it takes 10 A to buy a particular basket of goods and 15B to buy the same basket. The real exchange rate would be the nominal rate of A/B (2) times the price of the basket in B (15) and would divide all this by the price of the basket in A (10). In this case, the real A/B exchange rate is 3. As a result of this tendency to correct a country`s balance-of-payments imbalances only through changes in the economy as a whole, nations began to abandon the gold standard in the 1930s. This was the time of the Great Depression, when world trade virtually stopped. The Second World War made the transport of goods an extremely risky undertaking, so that trade remained minimal during the war. At the end of the war in 1944, representatives of the United States and their allies met in Bretton Woods, New Hampshire, to create a new mechanism to finance post-war international trade.
The system should be a fixed exchange rate system, but with much less weight on gold as the basis for the system. The Currency Board is an exchange rate system in which a country`s exchange rate maintains a fixed exchange rate with a foreign currency, on the basis of an explicit statutory obligation. It is a kind of fixed regime that has specific legal and procedural rules to make the pen “harder – that is, more durable.” Examples include the Hong Kong dollar against the US dollar and the Bulgarian lev against the euro.