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Applications Of Fixed Conversion (o) Exchange Rates

 Applications of Fixed Conversion (o) Exchange Rates

Disciplinary

    Another application claimed a system of fixed conversion rates is that it serves as a secure and inflicts a discipline on fiscal authorities to follow responsible financial policies with nations. Inflation will result balance of payments insufficient and reserve loss.

    Therefore the authorities will have to take counter measures to stop inflation. Predetermined conversion rate should thus inflict discipline on governments and terminate them from continuing inflationary strategies which are not of tune with the rest of the globe.

  1. Best for Small Nations
  2. Johnson favours fixed conversion rates in the banana republics where overseas business performs a central role. Supple conversion rates in them tend to inflation and decline when the conversion rate drops.

  1. Less Inflationary
  2. It tends to higher fiscal discipline and so as to less inflationary pressures.

  1. Conviction
  2. Fixed conversion rates create conviction about overseas payments among exporters and importers of goods for the reason that they are aware what they have to receive or pay in overseas conversion.

  1. Suitable for Normal Currency Areas
  2. This system is appropriate for normal currency areas such as Dollar, Euro etc. where predetermined conversion rates promote development of globe trade.

  1. Endorses Money and Capital Markets
  2. It endorses the development of international money and capital markets and assists the flow of capital among countries.

  1. Multilateral Trade
  2. This system promotes multilateral trade world wide among nations for the reason that nations have no dread of wide changes in conversion rates.

  1. International Fiscal Collaboration
  2. The system of predetermined conversion rates endorses international fiscal collaboration and so helps in the smooth functioning of the international fiscal system under such institutions as IMF, World Bank, Euro- Market.

    The following are the Non-Application of the above method.

  1. Sacrifice of Goals
  2. The doctrine defect in the operation of a system of fixed conversion rates is the sacrifice of the goal of full employment and stable prices at the revise of stable conversion rates. For instance, balance of payments regulations under predetermined conversion rates of an excess nation can take place through a hike in prices. This is bound to inflict huge social costs.

  1. Unforeseen Turbulence
  2. Under this system the consequence of non anticipated turbulence in the home fiscal are broadcasted overseas, whilst a nation may be banned by predetermined conversion rates from the full results of home disturbances and strategy mistakes it has to bear a share of the encumber of the turbulence and mistakes of others.

    For to the amount that surplus demand leaks out of the nation where it was initially generated it leaks in trading partner.

  1. Heavy Burden
  2. Under it, huge reserves of overseas currencies are needed to be preserved. Nations with balance of payments insufficiencies should have reserves if they want to keep away deflation.

    If nations wish to stay on the predetermined on the fixed conversion rate system they should hold huge reserves of overseas currencies. This also imposes a heavy burden on the fiscal authorities for managing overseas conversion reserves.

  1. Misallocation of Resources
  2. This system needs complicated conversion control measures which tend to misallocation of the fiscal resources.

  1. Complex System
  2. This system is very complicated for the reason that it needs highly skilled administrators to function it. It is also time consuming and may tend to doubt results. There is always the feasibility of inaccuracies in strategy formulation and execution.

  1. Comparative Benefits Ambiguous
  2. Under this system the comparative advantage of a nation is ambiguous. For example the conversion rate may be so low that a commodity may seem very inexpensive to the other nation.

    Resultant the nation may export that product in which it has no comparative benefit. On the contrary with a very high conversion rate the nation may posses comparative advantage in a a commodity.

  1. Problems of International Liquidity
  2. To enlarge its business a nation should have proper international liquidity. To uphold a predetermined overseas rate the nation should have sufficient reserves of overseas currencies to keep away balance of payments dissymmetry. Alternatively, surplus international liquidity is also not fine for the nation for the reason that the resulting extra demand may tend to international inflation.

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