In which of the following situations would a fixed exchange rate system be preferable to a flexible exchange rate system?Group of answer choicesTwo companies in different countries are at odds over which country's currency to use for a transaction, because of the risk that the exchange rate will change.None of the other options are situations where a fixed exchange rate is preferable to a flexible exchange rate.The domestic economy faces a recession and requires expansionary monetary policy.A recession hits a country's largest trading partner, resulting in a negative demand shock from lowering exports.
Question
In which of the following situations would a fixed exchange rate system be preferable to a flexible exchange rate system?Group of answer choicesTwo companies in different countries are at odds over which country's currency to use for a transaction, because of the risk that the exchange rate will change.None of the other options are situations where a fixed exchange rate is preferable to a flexible exchange rate.The domestic economy faces a recession and requires expansionary monetary policy.A recession hits a country's largest trading partner, resulting in a negative demand shock from lowering exports.
Solution
A fixed exchange rate system would be preferable in the situation where "Two companies in different countries are at odds over which country's currency to use for a transaction, because of the risk that the exchange rate will change."
Here's why:
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Predictability: A fixed exchange rate provides certainty and predictability as the rate is not subject to fluctuations. This can be beneficial for businesses engaging in international trade as it reduces the risk associated with exchange rate volatility.
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Reduces Exchange Rate Risk: In a situation where two companies in different countries are unsure about which currency to use due to potential changes in the exchange rate, a fixed exchange rate system can be beneficial. It eliminates the risk of the exchange rate changing and potentially causing a financial loss.
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Facilitates Trade: By eliminating the risk of exchange rate fluctuations, a fixed exchange rate system can facilitate international trade. It can make transactions easier to conduct and more predictable, which can be beneficial for businesses.
The other situations mentioned are not typically ones where a fixed exchange rate would be preferable. For instance, in a recession, a flexible exchange rate can provide more tools for economic adjustment. Similarly, if a country's largest trading partner is hit by a recession, a flexible exchange rate could allow the country to adjust more easily to the negative demand shock.
Similar Questions
In which situation is a country most likely to choose a flexible exchange rate for its currency?A.A country expects its currency to be more valuable than other countries' currency.B.A country does not want market trends to affect its trade with other countries.C.A country worries that the value of its currency could rise and fall unpredictably.D.A country wants to make sure that its currency is stable in all economic situations.
Which of the following is considered the most difficult consideration for a country when adopting a flexible exchange rate regime?Group of answer choicesThe country need to be prudent in their independent monetary and fiscal policies.The country needs to have a sophisticated financial system.The country’s currency value can be very volatile and create uncertainty for its businesses.Speculators are unable to destabilize the currency.
An exchange rate is flexible when it:A.sets the value of a currency automatically in relation to another currency.B.changes the value of different currencies based on their overall economic health.C.adjusts the value of a currency based on inflation and interest rates.D.allows market forces of supply and demand to set the value of a currency.SUBMITarrow_backPREVIOUS
Multiple Choice QuestionWhat is an alternative approach that some nations use to circumvent the disadvantages associated with flexible exchange rates?Multiple choice question.They link the rise and fall in value of their exchange rates to price changes in the economy.They link the rise and fall in value of their exchange rates to interest rate changes in the economy.They fix or peg their exchange rates to the value of another currency.They fix or peg their exchange rates to the value of the overall money supply in the economy.
Explain the Flexible exchange rate bringing out its advantages and disadvantages
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