The means of purchasing through trade is known as Currency. Today, generally currency refers to printed or minted money. Sometimes only paper bills are considered as a currency, while other times coins are also included in currency. The exchange of goods or services for cash is involved in currency.
Exchange rates means a country’s price for the trade of items.
Floating Currency
Floating currency merely means that a country’s exchange rate is not fixed or set in place by a main bank, but rather than that it fluctuates.
Fixed Currency
On the contrary fixed currency, is set and it is considered to be the opposite of floating currency. Fixed currency is also known as pegged currency and although it is often associated with the Euro and the US Dollar (USD) but it is not commonly used.
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A fixed exchange rate, is sometimes also referred to as a pegged exchange rate. It is a type of exchange rate regime in which a value of one currency is matched to the value of another single currency or to a group of other currencies, or it may also be matched to another measure of value, such as gold.
In order to stabilize the value of a currency a fixed exchange rate is usually used, vis-a-vis the currency it is pegged to. The trade and investments between the two countries is facilitated by this exchange rate regime, and it is particularly useful for small economies where external trade constitutes a large part of their GDP.
This exchange rate regime is also used as a means by which inflation is controlled. However, as there is arise and fall in the reference value, so does the same rise and fall is shown by the currency pegged to it. In addition to this, in order to achieve macroeconomic stability the use of domestic monetary policy by the government is prevented by a fixed exchange rate.
Maintaining a Fixed Exchange Rate
Typically, if a government is willing to maintain a fixed exchange rate then this can be done either by buying or selling its own currency on the open market. This is one of those reasons due to which governments maintain reserves of foreign currencies.
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small economies,
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