Chinese Yuan
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INTRODUCTION:
A floating exchange rate system is defined as a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand. The argument for a floating exchange rate system is based on two primary principles: monetary policy autonomy and trade balance adjustments. First, a monetary policy restores control of the currency to the government. The government can then implement policies without having to worry about maintaining a fixed exchange rate. In a floating system, domestic inflation impacts the exchange rate, but this does not affect the competitiveness of a business because of the exchange rate depreciation. The value of the currency on the foreign exchange market should fall in such an instance, making up for any rise in domestic costs. In addition, a government using the floating exchange rate system can contract the economy without having to worry about the need to maintain pegs and parity. The second case for a floating exchange rate system is the idea of trade balance adjustments, where if there is a trade deficit, the exchange rate depreciates since supply is in excess of demand. This in turn makes exports cheaper and imports more expensive, thereby favorably affecting the competitiveness of exporters in the home country.
A fixed exchange rate system is defined as a system under which the exchange rate for converting one currency into another is fixed...