What Are Different Exchange Rate Systems?

It is primarily devoted to laying out the basic tools for international economics, it is important to recognize that there are different approaches to managing a nation's exchange rates. The two systems most widely used today are flexible and fixed exchange rates. One system occurs when exchange rates are completely flexible and move purely under the influence of supply and demand. With this system, known as flexible exchange rates, governments take hands off policy toward their exchange rate and do not try to set a particular rate.

That is in a flexible exchange rate system, the relative prices of currencies are determined in the marketplace through the buying and selling of households and businesses. The United States currently relies upon a flexible exchange rate.

The other major system is fixed exchange rates, where governments specify the rate at which their currency will be converted into other currencies. The gold standard was a fixed exchange rate system, as was the Breton Woods system used by most countries after World War 2. Over the last decade, many European countries have operated a fixed exchange rate system.