Floating vs fixed exchange rate.

In plain English

Floating and fixed are the two ends of the exchange rate scale, and the choice between them decides who absorbs a shock. Under a float, the price of a currency is whatever buyers and sellers agree to that day, and the central bank stays free to set interest rates for its own economy. Under a fixed rate, the government commits to a level and defends it by buying or selling foreign currency reserves, so domestic interest rates end up serving the peg instead of the economy. Floats absorb pressure through the price of the currency. Fixed rates absorb it through reserves, prices, and jobs.

01Why it matters

Under a float, the cost of imported goods moves a little all the time. Under a fixed rate it can hold steady for years and then reset all at once if the peg gives way.

02The math, step by step

Say a floating currency slides from 10 to 11 per dollar over a year. That is a 10 percent move spread across 12 months. A fixed rate holds at 10 for three years, then breaks to 15 in a week. Same direction, but one is a drift and the other is a 50 percent jolt.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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