Research Case Study Example | Topics and Well Written Essays - 500 words

Research - Case Study Example (Baer, 34) Implementing a fixed exchange rate in Brazil is not a plausible concept because the value of the currency is constantly decreasing with the constant flooding of the currency in the market. The availability of the currency has prompted the currency to continuously lose its value, hence the increase in inflation (Taylor, 76). The same strategy (of using a fixed system) was applied in Zimbabwe, but the country succumbed to the harsh nature of inflation, this led to the country disregarding the local currency and using US Dollars instead. The URV or Unidade Real de Valor is a currency that is used in Brazil that is not subjected to the effects of inflation in Brazil. The aim was to absorb the effects of inflation in the country. The Brazil government implemented a fixed exchange rate for the URV to the Dollar (1 URV = 1 USD). However, the main problem was the fact that obtaining the URV was expensive as compared to using cruzerios reais, which is widely used in Brazil (1 URV = CR$ 2,750). The demand for the URV has only served to increase the exchange rate, and it is playing its part in the inflation that has plagued Brazil. (Blanchard, 54) Implementing a free-floating exchange rate will allow the currency to trade based on the conditions and regulations that are implemented in the market. The advantage is that the exchange rate will be stabilized by these market forces hence serve to regulate the exchange in the best interest of the market. However, the major disadvantage is that, excess freedom in the market, may encourage cartels to manipulate the exchange rate to their advantage, which may inconvenience other players in the market. Implementing both fixed and free-floating exchange rate mechanisms would be the ideal setting for the market. There should be freedom in the market that will allow the market to determine the suitable exchange rate for the operations of the market (Lagassa, 98). The