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Question
Discuss briefly the meaning of Flexible Exchange Rate.
Solution
Flexible Exchange Rate: Flexible exchange rate is the exchange rate that is determined in a flexible exchange rate system. Under the system of flexible exchange rate, the rate of exchange is determined by the market forces (demand for foreign exchange and supply of foreign exchange) with minimum or no government intervention. The equilibrium exchange rate is determined where the demand for foreign currency is equal to the supply of foreign currency.
The system of flexible exchange rate overcomes the various disadvantages associated with the fixed exchange rate regime. As against the system of fixed exchange rate, flexible exchange rate regime eliminates the need to hold huge gold reserves. Also, since the exchange rate is market determined, it eliminates the problem of overvaluation and undervaluation of currency. Besides this system of exchange rate promotes easy and free capital movements.
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