When discussing the relative pros and cons of a fixed exchange rate system compared to a floating exchange rate system, it is imperative to understand the meaning of both systems. “A fixed exchange rate is when a country ties the value of its currency to some other widely-used commodity or currency” (Amadeo, 2020).  With international trade, the currency most used around the world is the United States Dollar. Today, most fixed exchange rates are attached to the U.S. dollar. Countries that trade a lot with others may also fix their currency with those they trade with the most. With a fixed exchange rate, the government completely or partially sets that rate.

Now let’s look at the other end of the spectrum, the floating exchange rate system. With a floating exchange rate system, the system is tied to the supply and demand, relative to other currencies (the open market) (Mitchell, 2020). With a floating exchange rate, it is impossible for other countries and individuals to manipulate the currency price since the government and central bank diligently work on keeping the price advantageous for international trade.

When having a multinational business, you have to decide where you are going to operate primarily and where you want your plants and sales to generate from. Both a fixed rate exchange system and a floating exchange rate system have pros and cons for a multinational business, and it is important to review both sides and deciding what is considered important criteria when picking where and how you conduct business. With a fixed rate system, since the currency is tied to other countries that they trade with and the government sets the rate, the rules and regulations in place can benefit the country. With a fixed exchange rate, you can always exchange your money with one currency to another currency, one for one. That is another benefit with having a fixed exchange rate. There are also benefits with the floating exchange rate system. Since the system is tied to other currencies, the countries that they trade with could theoretically benefit the currency for both countries, especially if they have a lot of goods and products going back and forth.  Without the ability to influence the currency, is keeps things honest for the businesses that operate in that country.  

When deciding between fixed exchange rate and floating, one may be interested in the history between the two and how it began. Knowing the history can influence the past as so many things are cyclical. In the past, currencies were fixed to an ounce of gold. In 1944, with the Bretton Woods agreement, countries around the world agreed to peg its currency to the United States dollar. Flash forward about thirty years, President Richard Nixon decided to remove the dollar from the gold standard in order to end the recession. After this happened, many countries around the world still kept their currency pegged to the united states dollar. There can be something said about using a system that has been around and trusted for so many years with so many different countries around the world.

Amadeo, K. (2020, January 15). What the Riyal, Lev, and Krone All Have in Common. Retrieved February 6, 2020, from https://www.thebalance.com/fixed-exchange-rate-definition-pros-cons-examples-3306257

Hill, C.W. (2018). International Business: Competing in the Global Marketplace (12th ed.). New York, NY: McGraw Hill Education.

Mitchell, C. (2020, January 29). Floating Exchange Rate Definition and History. Retrieved February 6, 2020, from https://www.investopedia.com/terms/f/floatingexchangerate.asp

urgenurgentThanksmcgraw hill connect

Running​1​head:​1​DISCUSSION​1​RESPONSE​111111111111111111111111111111111111111111111111111111111111111111111111111111111​1

Hello,I hope you are fine. I have gone through your post, and I must state that I am

impressed by it. Before delving into the pros and cons of the floating and fixed exchange rate

systems, one must understand their meaning. It is true that when a country ties the value of its

currency to the widely used currency or commodity, it is referred to as a fixed exchange rate.

The United States of America dollar is commonly used as a trading currency in the international

set up. Therefore, that is the basic reason most countries use it to set their exchange rates.

Besides, countries can also fix rates to those countries they trade with mostly where by the

government can set a fixed exchange rate either partially or completely. Fixed exchange rate

systems we recommend during the first half of the 20th century. Governments strongly favored

them since it was mistakenly believed that they offered three key advantages. First, they would

reduce the risk of speculative capital flows that could destabilize the economy. Second, they

could introduce greater discipline in national policies to avoid inflation. Thirdly, they would

eliminate the risk of the exchange rate and, therefore, promote international trade.

On1the1other1hand,1the1floating1system1involves1governments1setting1rates1of1their

1currency1based1on1demand1and1supply1of1their1currency1relative1to1others.1This1means1t

hat1the1currency1rates1are1set1based1on1the1forces1of1the1open1market1under1the1laws1of

1demand1and1supply.1However,1I1agree1with1you1that1that1sets1the1exchange1rates1using1

the1floating1system1can1be1manipulative1because1the1central1bank1and1the1government1wil

l1work1diligently1so1that1they1keep1their1currency1competitive1in1the1international1trade.1

In1your1post1about1the1advantages1of1a1fixed1rate,1I1think1you1should1have1stated

1that1the1fixed1exchange1rate1system1has1more1disciplined1economic1policies.1In1a1fixed1

DISCUSSION​1​RESPONSE​1111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111​2

exchange1rate1system,1high1inflation1in1a1country1causes1foreign1buyers1to1pay1a1higher1

price1for1that1country’s1exports.1It1also1makes1the1country’s1import1sector1less1competitive

.1Exports1weaken1and1imports1strengthen.1These1twin1pressures1worsen1the1balance1of1pa

yment1positions1as1the1economy1becomes1less1competitive1concerning1foreign1countries,1

which1leads1to1unemployment.1It1was1thought1that1these1forces1would1pressure1governme

nts1to1implement1anti-inflationary1policies.

In1addition,1a1fixed1exchange1rate1eliminates1the1exchange1rate1risk.1It1was1though

t1that1the1absence1of1this1risk1benefited1international1trade1and1capital1flows.1Also,1it1is1t

hought1that1speculation1inevitably1created1unviable1volatility1and1destabilized1a1flexible1or

1free-floating1exchange1rate.1This1would1be1detrimental1to1small1economies1that1depended

1on1a1high1level1of1international1trade.

Contrastingly,1its1disadvantage1is1that1a1fixed1exchange1rate1does1not1automatically

1correct1an1unbalanced1balance1of1payments.1A1fixed1system1forces1a1government1to1corr

ect1the1imbalance1by1increasing1interest1rates1and1reducing1domestic1demand.1This1does1

not1allow1internal1economic1policies1to1focus1on1unemployment1and1inflation.1On1the1con

trary,1a1floating1exchange1rate1releases1internal1policy,1and1the1currency1is1automatically1

devalued1to1correct1the1external1imbalance.1Furthermore,1fixed1rates1do1not1automatically1

harmonize1the1different1national1economic1policies1that1differ1between1countries.1For1exa

mple,1high1inflation1countries1will1be1less1competitive1compared1to1low1inflation1countrie

s.1This creates1speculation1of1a1devaluation,1putting1pressure1on1the1government1to

devalue.

DISCUSSION​1​RESPONSE​1111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111​3

References

Buffie,1E.1F.,1Airaudo,1M.,1&1Zanna,1F.1(2018).1Inflation1targeting1and1exchange1rate1ma

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181,1159-184.

Martin,1F.1E.1(2016).1Exchange1rate1regimes1and1current1account1adjustment:1An1empirica

l1investigation.1Journal1of1international1Money1and1Finance,165,169-93.

Qureshi,1M.1S.,1&1Tsangarides,1C.1G.1(2015).1Exchange-rate1regimes1and1trade:1is1Africa

1different?1In1Growth1and1Institutions1in1African1Development1(pp.181-106).1Routl

edge.