Economics Assignment - Criticisms of Flexible Exchange Rate, Sterilized Intervention, Seigniorage Revenue, and Emerging Market Economy

1
Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the student
Name of the University
Author note

2ECONOMICS ASSIGNMENT
Table of contents
Answer 1..................................................................................................................................................3
Answer 2..................................................................................................................................................3
Answer 3..................................................................................................................................................3
Answer 4..................................................................................................................................................4
Answer 5..................................................................................................................................................4
Answer 6..................................................................................................................................................5
Answer 7..................................................................................................................................................6
Reference list...........................................................................................................................................7

3ECONOMICS ASSIGNMENT
Answer 1
There are many criticisms based on to the flexible rate regimes which states that the
elasticity in the international market are quite low for the exchange rate in order to work
successfully (Ellis & Elbahnasawy, 2018). Flexible exchange rate create conditions of
instability and it also have an adverse effect on the economic structure.
The three criticisms based on the flexible rate system are:
 Possibility of disequilibrium: there will be a possibility that forces of demand
and supply in the foreign exchange market will operate in such a way that the
rate of exchange diverges farther from the natural level of rate of exchange.
The variations in the rate of exchange fail to bring in the equilibrium.
 Indirect government intervention: the government usually does not interfere in
the exchange controls of the flexible exchange rate.
 Fragmentation of the world market: There is an absence of stable medium of
exchange and stable store of value. The world trade and the welfare also gets
affected.
 Exchange risks and uncertainity: the flexible exchange rates causes variations
in the rates of exchange whivh will create exchange risks and impede the
capital movements.
Supporters of the floating system rate countered that international traders can avoid the risk
of exchange rate with the help of transactions in the forward exchange market. It can
automatically prevents instability in the domestic money market from affecting the money.
This is also a powerful argument in favor of the exchange rate. Proponents of floating also
stated that capital flows will be in a destabilizing manner under fixed rates.