Question
Comment briefly on the following statements:
a) "A system of floating exchange rate fails when governments ignore the verdict of the exchange markets on their policies and resort to direct controls over trade and capital flows."
b) "Devaluation is the most effective remedy for correcting and adverse BOP
situation".
c) "Interest rate parity and leading/lagging are related to forward contracts".
d) "Financial appraisal is said the key most appraisal of any project".
Answer :
Word Count : 378
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A system of floating exchange rate fails when governments interfere with the natural functioning of the foreign exchange markets. In a true floating exchange rate regime, currency values are determined by demand and supply factors reflecting market confidence, trade balance, and capital flows. However, when governments ignore these signals and instead impose direct controls over trade or restrict capital movements, the credibility of the system collapses. Such interventions create distortions, discourage investors, and undermine transparency in international financial markets, leading to a breakdown of the floating exchange mechanism. Devaluation is considered one of the most effective measures to correct an adverse balance of payments situation, especially under a fixed exchange rate system. By officially reducing the value of a country’s currency, exports become cheaper and
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