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1. Compare and contrast the fixed, freely floating, and managed float exchangerate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange rate system?
Under a fixed exchange rate system, the governments attempted to maintain exchange rates within 1% of the initi¬ally set value (slightly widening the bands in 1971). Under a freely floating system, government intervention would be non existent. Under a managed float system, governments will allow exchange rates move according to market forces; however, they will intervene when they believe it is necessary.
A freely floating system may help correct balance-of-trade deficits since the currency will adjust according to market forces. Also, countries are more insulated from problems of foreign countries under a freely floating exchange rate system. However, a disadvantage of freely floating exchange rates is that firms have to manage their exposure to exchange rate risk. Also, floating rates still can often have a significant adverse impact on a country's unemployment or inflation.
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