Floating Exchange Rate vs Fixed Exchange Rate
Floating Exchange Rate and Fixed Exchange Rate are two International Trade & Finance concepts in AP Economics that students often mix up. In short: floating exchange rate is a floating exchange rate is determined freely by market supply and demand without government intervention. Meanwhile, fixed exchange rate is a fixed exchange rate is set and maintained by a government or central bank at a specific value against another currency. Here is how they compare side by side.
A floating exchange rate is determined freely by market supply and demand without government intervention.
Most major currencies, such as the dollar and euro, float. Rates adjust automatically to trade and capital flows but can be volatile. It contrasts with a fixed exchange rate, which a government pegs.
A fixed exchange rate is set and maintained by a government or central bank at a specific value against another currency.
The central bank buys or sells its currency and holds foreign reserves to defend the peg. It gives stability for trade but requires large reserves and limits independent monetary policy. Some countries have used fixed or managed exchange rates.