Costs and benefits of fixed exchange rate
Fixed or stable exchange rates ensure certainty about the foreign payments and inspire confidence among the importers and exporters. This helps to promote international trade whereas one of the main disadvantage is that the prices were more flexible. Since all these conditions are absent today, the smooth functioning of the fixed exchange rate system is not possible. If exchange rate is allowed to decline, import goods tend to become dearer. High cost import goods then fuels inflation. Such a situation can be prevented by making the exchange rate fixed. Disadvantages: (i) Speculation Encouraged: In fact, uncertainty and, hence, speculative activities, tend to get a boost even under the fixed exchange rate