Explain How Exchange Rates Are Determined in a Fixed Exchange

question 144

Essay

Explain how exchange rates are determined in a fixed exchange rate system. Discuss the advantages and disadvantages of a fixed exchange rate system.

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Definitions:

Price-taker Firm

A company that has no control over the market price and must accept the prevailing market price for its products.

Short Run

A period in economics during which some factors of production are fixed, limiting the ability to fully adjust to market changes.

Elasticity of Market Supply

The degree to which the quantity supplied of a good changes in response to a change in price.

Output Expansion

The increase in the production of goods and services in an economy or by a firm, often as a result of increased demand or improved production capabilities.