Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

(a) MERITS: 
 
1. Promotes trade: 
 
As the exchange rates are stable, international trade is 
promote without any speculation and forecasting. The fixed 
exchange rates creates certainty and assurance in the trade. it 
helps to increase trade world wide being uncertainly to be occurred 
in future transactions. 
2. Capital movements: 
 
Fixed exchange rates ensures the regular flow of the 
international capital movements. Since investors are assured of 
regular returns, FDI is encouraged. It also supports the growth of 
money and capital markets. It facilitates capital movement by 
private firms. A stable currency does not involve any uncertainties 
about capital loss on account of changes in exchange rate. 
3. No speculation: 

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Being fixed in nature, there is no chance to speculate the 
fluctuations in the exchange rates. Certainty in the rates is highly 
featured in this method. 
4. Exchange rate stability: 
A stable exchange rate helps to achieve internal economic 
stability and avoids problems of hoarding, decline in investment and 
unemployment. It would be very difficult in the fluctuating exchange 
rate system. It should be noted that for developing nations a stable 
or fixed exchange rate system has special advantage because they 
have persistent balance of payment deficits. 
5. Simple and systematic: 
The economic transactions between nations has become too 
complex that it is advantageous to follow a fixed exchange rate 
system. it systematized the worlds monetary system. 
6. Promotes growth of internal money and capital markets: 
Fixed exchange rate system is good for the small nations as 
their transactions are small and need highly certainty and surety. It 
minimizes risk. It promotes growth of internal money and capital 
markets. Since flexible exchange rates cause uncertainties about 
the future exchange rates, individuals, companies and institutions 
are reluctant to lend to and borrow form the internal money and 
capital markets.