to increase inflation and - most importantly - it creates a very high level of certainty within the realm of international trade precisely because it provides a fixed pattern for the exchange rates among all of the countries concerned.
The chief disadvantages of such a fixed exchange rate is that a country may not be able to isolate its economy from economic problems in other parts of the world (such as recessions, depressions or high rates of inflation) and a country that finds itself in a deficit situation with high payments (either to another country in terms of a trade imbalance or loan repayment or to an entity such as the International Monetary Fund) can find these payments impossible to meet when that country itself is faced with internal economic problems such as recession, high unemployment, or even a contraction of economic growth.
However, while fixed-rate exchanges are still sometimes used, it is the far more common pattern in today's world economy that an exchange rate "floats". A "floating" exchange rate exists when global conditions of supply and demand establishes the rate of exchange. This type of exchange rate can produce a far less stable economic situation in a country, and by extension in that countries trading and banking partners as well as its geographic neighbors. The following diagram illustrates a standard BP curve if th
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