Asked by Crissy Hogue on Jul 13, 2024
Verified
Which of the following is not a major disadvantages of a flexible exchange-rate system?
A) It is susceptible to wild swings in rates, causing high uncertainty and reduced trade.
B) It could drain the foreign-exchange reserves of a nation.
C) A depreciation of a nation's currency would worsen its terms of trade.
D) Wild swings in exchange rates may destabilize the domestic economy through the effects on the traded-goods sectors.
Flexible Exchange-Rate System
A currency valuation system where the value of a currency is allowed to fluctuate in response to foreign exchange market mechanisms.
Foreign-Exchange Reserves
Stockpiles of foreign currencies maintained by a nation’s central bank. Obtained when the central bank sells local currency in exchange for foreign currency in the foreign exchange market.
Terms of Trade
This refers to the ratio at which a country's exports are exchanged for its imports, influencing the country's economic health.
- Apprehend the differentiation between fixed and flexible exchange rate systems, coupled with their merits and demerits.
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Learning Objectives
- Apprehend the differentiation between fixed and flexible exchange rate systems, coupled with their merits and demerits.
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