What are the advantages and disadvantages of the Floating Exchange Rate system? A Fixed Exchange Rate system? 8. What was established at the Breton Woods Agreement? Has it worked? Why or why not? 9. Do you think we need to move back toward a fixed exchange rate system?

7)

Floating Exchange Rate advantages:

1. A deficit in balance of payments will depreciate the country's currency, making it cheaper in the international market and may increase demand, which may offset the deficit in the balance of payments
2. Governments may freely manipulate the value of their own currency to their advantage.
3. The currency value is flexible as it is based on supply and demand.

Floating Rate disadvantages:

1. As it is based on supply and demand, there is uncertainty in the value of the currency.
2. The uncertainty in the currency value may discourage foreign investments.
3. Speculations around the currency value may trigger many money conversions, making the currency value very volatile.

Fixed Rate advantages:

1. Currency value eliminates uncertainties and risks.
2. A more stable currency entices direct foreign investments.
3. As its value is indexed on a commodity or another currency, currency depreciation is avoided.

Fixed Rate disadvantages:

1. Tedious maintenance of foreign exchange reserves, especially for third-world countries.
2. Encourages speculative currency transactions
3. When a country experiences large balance of payment deficits, the government will depreciate its own currency, thereby slowing economic growth.

8) The Bretton Woods Agreement was established in order to promote international economic growth through an efficient foreign exchange system fixed on the US Dollar, which was pegged on the value of gold. Basically, the agreement created a global fixed exchange rate system. The agreement collapsed when US President Nixon devalued the US dollar relative to its gold value on a concern that the US gold supply was not enough to support the value of the US dollar in circulation (a disadvantage of a fixed rate system). It has been successful, until the US can no longer maintain the value of the US dollar. Having a currency as a basis of all currencies is hard to maintain, leading to is failure.

9) I don't think that we should go back to a fixed rate system, because it bears a high risk of failure of the pegged/indexed currency/commodity fails to sustain its value. I think we should maintain our currency values dependent on the supply and demand and let the governments manipulate them to their own countries' advantage.

Step-by-step explanation

See below:

7)

Floating Exchange Rate advantages:

1. A deficit in balance of payments will depreciate the country's currency, making it cheaper in the international market and may increase demand, which may offset the deficit in the balance of payments
2. Governments may freely manipulate the value of their own currency to their advantage.
3. The currency value is flexible as it is based on supply and demand.

Floating Rate disadvantages:

1. As it is based on supply and demand, there is uncertainty in the value of the currency.
2. The uncertainty in the currency value may discourage foreign investments.
3. Speculations around the currency value may trigger many money conversions, making the currency value very volatile.

Fixed Rate advantages:

1. Currency value eliminates uncertainties and risks.
2. A more stable currency entices direct foreign investments.
3. As its value is indexed on a commodity or another currency, currency depreciation is avoided.

Fixed Rate disadvantages:

1. Tedious maintenance of foreign exchange reserves, especially for third-world countries.
2. Encourages speculative currency transactions
3. When a country experiences large balance of payment deficits, the government will depreciate its own currency, thereby slowing economic growth.

8) The Bretton Woods Agreement was established in order to promote international economic growth through an efficient foreign exchange system fixed on the US Dollar, which was pegged on the value of gold. Basically, the agreement created a global fixed exchange rate system. The agreement collapsed when US President Nixon devalued the US dollar relative to its gold value on a concern that the US gold supply was not enough to support the value of the US dollar in circulation (a disadvantage of a fixed rate system). It has been successful, until the US can no longer maintain the value of the US dollar. Having a currency as a basis of all currencies is hard to maintain, leading to is failure.

9) I don't think that we should go back to a fixed rate system, because it bears a high risk of failure of the pegged/indexed currency/commodity fails to sustain its value. I think we should maintain our currency values dependent on the supply and demand and let the governments manipulate them to their own countries' advantage.