Comparison: Fixed vs Floating Exchange Rates (HL only)

This topic compares fixed and freely floating exchange rate systems, explaining how a fixed rate is maintained by a central bank through intervention and reserves, while a floating rate is set by market demand and supply. It outlines the trade-offs: fixed rates give exchange-rate stability and reduced speculation but require reserves and limit monetary policy independence, whereas floating rates allow policy freedom and automatic adjustment but can be volatile and create uncertainty for trade and investment.