The world has known various exchange rate regimes and many countries today go ab

Question

The world has known various exchange rate regimes and many countries today go about exchange rate policies in differing ways. The Gold Standard was used in the past as was the Bretton Woods System (late 1940s–early 1970s). Today, some countries use a so–called "crawling peg" while others actually fix their currency to another's currency. Obviously there are several choices available. After a proper review (see above steps #1 and #2 and review appropriate electronic sources), please argue for a proper exchange rate policy for the United States. Keep in mind that the US dollar has been falling in value for the last few years. (That may or may not be good or bad in your opinion.)

Explanation / Answer

Since US is a highly developed country, it should focus on using a floating exchange rate. Under a floating exchange regime, the rate is determined by the supply and demand for a country’s currency. The major benefit of this regime is that it allows the country to absorb both foreign and domestic shocks, keeping the economy stable. It helps the economy be monetarily independent, which makes room for macroeconomic flexibility. This will greatly help a largely developed country like US by keeping it independent as well as safe.

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