Chapter 18, Problem 13AA

To determine

To describe: The reason for fixing of rate of exchange was difficult in earlier times.

Explanation of Solution

Fixed exchange rates are kept by continuous buying or selling of own currency through the open market operations.

It was difficult to maintain a fixed exchange rate system in the past because it needed high-interest rates. Currencies needed support by large requirements of reserves so as to maintain the fixed exchange rate system and avoid the under or overvaluation of the currencies.

Even the central bank was required to maintain the interest rates high to keep the exchange rates fixed which limited the economic growth of the nation. So, finally, the Bretton woods regime was broken because of the difficulty in maintaining such an exchange rate and countries started adopting the floating exchange rate system.