1. It ensures stability in exchange rate. The exporters and importers have not to operate
under uncertainty about the exchange rate. Thus it promotes foreign trade.
2. It promotes capital movements. Fixed exchange rate system attracts foreign capital because
a stable currency does not involve any uncertainties about exchange rate that may cause
capital loss,
5. It forces the government to keep inflation in check. In case of fixed exchange rate
system,inflation causes balance of payments deficit resulting in depletion of foreign
exchange reserves.
2. Under this system, countries with deficits in balance of payment run down this stock of
gold and foreign currencies. This can create serious problem for them. They may be
forced to devalue their currency. On the other hand countries with surplus in balance of
payments will face the problem of inflation.
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Demerits of flexible exchange rate system
1. It creates situations of instablility and uncertainty. Wide fluctuations in exchange rate are
possible. This hampers foreign trade and capital movements between countries.
3. The uncertainty caused by currency fluctuations can discourage international trade and
investment.
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