Which of the following is DEMERIT of fixed exchange rate system?

• Government need not maintain 100% gold reserves
• It solves the problems of currency over/under valuation
• It prevents any kind of unwanted speculation in the market
• There is no stability in the foreign exchange market

None of the above

Fixed exchange rate system refers to the system in which the rate of exchange for the currency is fixed by the government itself. Following are the demerits associated with the same:

1. It does not encourage venture capital
2. There stands a possibility of under or over valuation of currency due to government intervention.
3. There is a need to maintain 100% gold reserves by the government

The following are the merits of the same:

1. It ensures stability in the market and prevents speculation
2. Coordination of macro policies become convenient