Essay: Free Floatation of the Currency

Sample Essay

Another response the United Kingdom took was the free floatation of the currency. Floating of currency freely implies the fluctuating exchange rates that are determined by the market forces. They are different from the fixed exchange rates which some economies used. In a free floatation economy, the currency value is allowed to fluctuate according to the foreign exchange market (Esping-Andersen, 1990).

The United Kingdom allowed its currency to free fluctuate in the foreign exchange market where the currency would automatically adjust itself. The merit behind the automatic adjustment is that the economy is able to dampen the effects of stock and that of the business cycle. This leads to correction of the balance of payment crisis as well as the terms of trade (Moran & Wright, 1991). The effect is to restore the financial crisis within the economy.

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