Why there is need for keeping large reserves by govt in fixed exchange rate system? Plz explain in briefly and with example
Dear Student
Under the flexible exchange rate system, the demand and supply of foreign exchange automatically adjusts itself however, under the fixed exchange rate system, the parity value of the currency is kept fixed thus, any shortage in the supply would need to be fulfilled by the Central Bank through its reserves. This is the reason why Central Bank has to keep a higher reserve of foreign exchange with itself.
Hope this information clarifies your doubts. Keep posting :-)
Regards
Under the flexible exchange rate system, the demand and supply of foreign exchange automatically adjusts itself however, under the fixed exchange rate system, the parity value of the currency is kept fixed thus, any shortage in the supply would need to be fulfilled by the Central Bank through its reserves. This is the reason why Central Bank has to keep a higher reserve of foreign exchange with itself.
Hope this information clarifies your doubts. Keep posting :-)
Regards