Dual Rate System

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Definition: Dual Rate System

A Dual Rate System refers to the situation where domestic currency in a country has two exchange rates: 

1) One is official fixed Rate, and

2) Floating rate which can be market dependent

Normally a currency normally has one rate but in dual rate system there are two different rates. 

Both the exchange rates are used by the governments in different situations.

In this system, the government satisfies the heavy foreign currency demand using the floating exchange rate market instead of depleting precious foreign reserves using the fixed exchange rate system. Changes in the free floating rate will reflect on the demand and supply.

The use of multiple exchange rates is an indirect method of imposing tariffs or taxes.

1) A lower exchange rate applied to essentials

2) A high exchange rate on luxury imports

Similarly, a high exchange rate in exports of a specific industry serves as a tax on profits.


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