Exchange Rate Systems: Fixed versus Free Floating

The video tutorial explores the differences between free floating and fixed exchange rate systems, highlighting their advantages and disadvantages. It explains how free floating rates are determined by market forces, while fixed rates involve central bank intervention. The tutorial discusses China's management of its exchange rate and the role of foreign reserves. It also examines the impact of speculation on fixed exchange rates, using the UK's experience in 1992 as a case study.

What are the main differences between free floating and fixed exchange rate systems?

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How does a fixed exchange rate system operate?

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What are the advantages of a free floating exchange rate system?

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Discuss the impact of trade imbalances on exchange rates in a free floating system.

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What is the Marshall-Lerner condition and why is it important?

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What are the potential risks associated with a free floating exchange rate?

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What role do central banks play in a fixed exchange rate system?

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What are the implications of a country maintaining a fixed exchange rate in terms of foreign reserves?

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Explain the concept of currency speculation and its impact on fixed exchange rates.

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How did the UK experience during the exchange rate mechanism in 1992 illustrate the vulnerabilities of fixed exchange rates?

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