Floating exchange rate is a type of exchange rate regime in which the value fluctuates constantly and is determined by free market through demand and supply of that currency.
Under the floating exchange rate system, the price of a currency automatically adjusts to balance the supply and demand in market. It requires minimum or no intervention in the currency market by central bank. However, in some rare circumstances in which the currency experiences extreme appreciation or depreciation, the central bank might force to interfere the market to avoid inflation.
In the reality world, floating exchange rate is more preferable and is widely used in most of the countries. However, there are some arguments about the drawbacks of the floating rate system. Despite offering more flexibility for the trade in market, it carries a lot of uncertainties and instabilities into trade market. Importers and exporters will suffer from the fluctuation of the rate and prices and thus affecting their buying and selling transactions. This uncertainty could contribute to lack of investment domestically and from abroad due to the investors are unsure about their profits. Another distinct disadvantage is it increases the foreign exchange volatility and hence encourages inflation.
Gold standard is a monetary system in which a particular currency unit is freely converted into a fixed quantity of gold. Under this monetary system, gold represents the only standard of value. A currency is used as international payments as it could freely convertible into a fixed amount of gold.
A gold standard restricts the Federal Reserve to substantially alter the growth of money supply. Inflation is rare under the system as the money supply is highly depending on the gold supply. In other words, the governments can only print the money up to a maximum which is equivalent to its gold value. Hence, this system promotes long term price stability. Some views claim that this stability could help to...