A detailed explanation of fixed and floating exchange rate systems and their characteristics.
Fixed exchange rate system: In a fixed exchange rate system, a country's government determines the value of its currency against another currency or a commodity like gold. This system provides stability but can face challenges when economic conditions change.
Floating exchange rate system: Under a floating exchange rate system, a country's currency value fluctuates based on supply and demand in the market. This system allows for adjustments in response to economic changes and is more flexible.
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