Arguments in Favour of Fixed Exchange Rate
1. Encouragement to Foreign Trade: The system of fixed exchange rate provides a suitable environment for foreign trade. The exporters and the importers have no fear of changes in the prices of goods and it helps to promote the foreign trade.
2. End to Speculations: There is no uncertainty in the foreign exchange market under the system of fixed exchange rate. It helps to bring an end to the activities of speculation as a result of uncertainty.
3. Internal Stability: Fixed exchange rate results in internal economic stability of a country. The fluctuations in the price level are reduced to the minimum on account of stability of exchange rate and the prices of imports and exports.
4. Useful for Small Countries: For the small countries like Denmark, Belgium, etc. this system of the exchange rate has turned out to be very useful. For the countries dependent on foreign trade for their economic development, the stability of exchange rate is essential. Flexibility in the rate of exchange may adversely affect the process of economic development of these countries.

Arguments against Fixed Rate of Exchange
1. Monetary Dependence: If the exchange rate is fixed then the unfavorable Balance of Payments of a country has an adverse effect on the level of domestic output and income. Under such a situation, the government of a country will have to adopt such a monetary policy, which does not influence its exchange rate. Thus, the government is not free to formulate an independent monetary policy.
2. Cost-price Relationship: The fixed exchange rate is not determined in accordance with the value theory of price determination. Since economic policies of different countries are not alike, their cost-price relationships do not remain stable. Thus, fixed exchange rate does not enable us to analyze the changes in cost-price relations and their effect on the exchange rate.
3. Increase in Demand for Foreign Exchange: The demand for foreign exchange in a country increases under the system of fixed exchange rate. Therefore, the government will have to accumulate the stock on a foreign exchange and consequently, will have to bear the opportunity cost of foreign exchange.
4. Slow Rate of Growth: There is a lack of co-ordination among the economic policies of different countries under the system of fixed exchange rate. As a result, a country fails to achieve the desired rate of growth in the absence of co-ordination and co-operation of other countries.

Arguments in Favour of Flexible Exchange Rate
1. Solves the Problem of BoP Deficit: The flexible exchange rate helps to solve the problem of BoP deficit of a country. For example, if demand for foreign exchange exceeds its supply, the rate of exchange will increase to attain equilibrium. On the other hand, if the supply of foreign exchange exceeds its demand, the rate of exchange will decrease to attain equilibrium.
2. Effective Monetary Policy: According to Prof. Friedman, the monetary policy of a country can be effectively implemented if its exchange rate is flexible. lf the objective of monetary policy is to increase the level of production then rate of interest will be reduced to provide an incentive for investment. It will also result in an increase in the level of output and' hence the exports.
3. Regulations of Import and Export: The level of production, income, and employment keep on changing in an economy. These changes influence the demand for and supply of goods. Keeping in view the demand and supply of goods, the government of a country may introduce changes in its imports and exports, which are possible only under the system of the flexible exchange rate.

Arguments against Flexible Exchange Rate
1. Effect on Economic Structure: The economic activities of the intemational market have a direct impact on the structure of an economy if the exchange rate is flexible. The fluctuations in international market influence the price level, level of output and employment of an economy.
2. Uncertainty: Flexible exchange rate creates an environment of uncertainty in the international market, which in tum adversely affects the flow of capital among the countries. Moreover, it hinders the process of borrowing and lending of loans in the international market.
3. Internal Instability: The system of the flexible exchange rate, sometimes, results in the problem of internal instability in a country if the assumptions of full employment, perfect competition and perfect mobility of factors of production are not fulfilled.
4. Unnecessary Capital Movements: Under the system of the flexible exchange rate, capital movements among the countries may increase unnecessarily. Such capital movements may prove to be harmful to the structure of an economy.