Fixed exchange rate

• Officially fixed by the government or monetary authority and not

determined by market forces. 
• very small deviation from this fixed value is possible.
• foreign central banks stand ready to buy and sell their currencies at a
fixed price. 
• This kind of system was used under Gold Standard System in which
each country committed itself to convert freely its currency into gold
at a fixed price.
Merits
• It ensures stability in exchange rate
• Fixed exchange rate ensures that major economic disturbances in
the member countries do not occur
• It prevents capital outflow
• prevents risk and uncertainty in transactions
•  Prevention of Depreciation of Currency:
• Attraction of Foreign Investment
•  Anti-inflationary
Demerits
• Benefits of free markets are deprived
• There is always possibility of under-valuation or over-valuation.
•  Speculation Encouraged
• Adequacy of Foreign Exchange Reserves
• Internal Objectives of Growth and Full Employ­ment Sacrificed
Floating
• rate of exchange is determined by forces of demand and supply of
foreign exchange 
• value of currency is allowed to fluctuate or adjust freely 
Merits
•  There is no need for government to hold any foreign exchange
reserve
• It helps in optimum resource allocation
• It frees the government from problem of BOP
•  Problems of Undervaluation and Overvaluation are Avoided
•  It Ensures Individual Freedom
Demerits
• Flexible Exchange Rates Create a Situation of Instability and
Uncertainty
• Provides an Inflationary Bias to an Economy
• Hampering Investment