what is exactly meant by international liquidity and why is a disadvantage for the fixed exchange rate system? please explain
International liquidity means the ability of a party to readily buy or sell currency at a reasonable price in the market. If the market is highly liquid then there will be lots of participants who are available to trade and you can buy and sell at the market rate. If the market is not liquid then there will be few participants willing to trade. Because of the lack of participants those that do agree to trade could only offer penal terms. This is bad for fixed rate regimes because if there is poor liquidity then maintaining the level of the currency could turn very costly.
Thankss i got everythingg except the penal terms part. What does it mean by the traders could ask for penal terms? Also does the govt face costs because it could have otherwise earned a higher amount in the transaction and hence improve exports?
