Exchange Rates Essay Example | Topics and Well Written Essays - 250 words

Exchange Rates - Essay Example However, the opposite happens in fixed rate regime. Furthermore, in fixed exchange rate the price of one currency is permanent comparative to all other currencies by state authority. However, in flexible or the floating exchange rate system, the value of a currency is permitted to vary in reaction to the forces in the market. Alternatively, under the fixed exchange rates, expansion of money reduces interest rates thus leading to outflows of capital. The eventual loss in coffers lowers the money supply (Jones & Lumby, 2003). On the flip side, under the flexible regime the exchange rate is depreciated by the capital outflow resulting to a stimulated output (Mukherjee, 2007). Finally, under the fixed exchange rate, positive demand increases interest rates and provokes an inflow of capital that balances the loss of the coffers through deficit of trade. In contrast, under the floating rates the inflow of capital appraises the exchange