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

(a) MERITS: 
 
1. Smooth adjustment: 
Flexible exchange rate bring smooth adjustment in BOP 
position automatically. When there is deficit in the BOP, the 
external value of the currencies fall. It encourages export and 
discourages imports and thus automatically brings equilibrium in 
the BOP. 
 
2. Freely determined: 
This system is quite simple. The exchange rate changes 
freely to equate demand and supply and the problem of scarcity or 
surplus is automatically solved. 
 
3. Easen liquidity problem: 
As exchange rate moves freely, there is no need to maintain 
large scale reserves. The flexible exchange rate system solves the 
problem of international liquidity automatically. 
 
4. Avoids prolonged Disequilibrium: 
The flexible exchange rate system facilitates continues 
adjustments. So a prolonged disequilibrium is automatically 
avoided. It helps government to get rid of BOP deficit problem. As 
has been seen above, the fixed exchange rates system leads either 
to deficit or surplus in BOP. Under this system the Government 
remains preoccupied with the questions of devaluation or 
revaluation of their currencies. 
5. Growth of multilateral trade: 
Flexible exchange rate promotes free trade. It does not 
require the use of exchange control which may be necessary under 
the fixed exchange rate system. It is good under the multilateral 

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trade system. Like fixed exchange rate, it does not create serious 
problem. It will ensure rapid growth of multilateral world trade. 
 
 
6. Full employment: 
Flexible exchange rates reflect the true cost-price structure 
relationship. They are more suitable to countries seeking to follow a 
policy a full employment.