Components of GDP and Growth Rates of Real GDP

Running head: COMPONENTS OF GDP AND GROWTH RATES OF REAL GDP
Components of GDP and Growth Rates of Real GDP
Name of the Student
Name of the University
Course ID

COMPONENTS OF GDP AND GROWTH RATES OF REAL GDP1
Table of Contents
Question 1........................................................................................................................................2
Fixed exchange rate system.........................................................................................................2
Question 2........................................................................................................................................2
Floating exchange rate.................................................................................................................2
Question 3........................................................................................................................................3
Pegged exchange rate system......................................................................................................3
Question 4........................................................................................................................................4
Question a....................................................................................................................................4
Question b....................................................................................................................................4
Question c....................................................................................................................................4
Question 5........................................................................................................................................4
References........................................................................................................................................8

COMPONENTS OF GDP AND GROWTH RATES OF REAL GDP2
Question 1
Fixed exchange rate system
Under fixed exchange rate system, the monetary authority of a nation fixed value of its
currency against another currency or a selected basket of currency or some other standard such
as gold. The authority maintains the fixed rate through open market transaction of its own
currency. If the exchange rate moves far beyond the benchmark limit then government sells
domestic currency and buys foreign currency resulting in a decrease in relative value of the
currency. The reverse is done when value of the exchange falls too below the benchmark limit.
Advantages and disadvantages
The main advantage of fixed exchange rate system is it helps to avoid fluctuation in
currency. The fluctuations of currency increases risk for business dependent on trade (Elfadil &
Ahmed, 2019). Fixed exchange rate by reducing volatility of currency encourage investment and
helps in controlling inflation at a low level.
The benchmark exchange rate may contradict with other macroeconomic goals. Under
fixed exchange rate because of less flexibility of currency it become difficult for countries to
adjust to temporary shocks.
Question 2
Floating exchange rate
Under regime of floating exchange rate, exchange rate of a nation is determined in the
foreign exchange market by the demand and supply of currency in relation to currency of some