A common argument for fixed exchange rates is that they:
A) make trade more costly, and thus encourage domestic citizens to buy domestically produced output.
B) give central banks greater freedom in adjusting their economy's level of output.
C) forever free the central bank from have to adjust the exchange rate to fundamental changes in the economy.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

Fixed exchange rates do not inherently make trade more costly; rather, they can make international transactions more predictable by reducing exchange rate volatility. This predictability can encourage trade rather than discourage it. They also limit the central bank's ability to adjust the economy's output level independently, as monetary policy is often tied to maintaining the fixed exchange rate. Furthermore, central banks may still need to adjust the fixed exchange rate in response to fundamental changes in the economy, contradicting the idea that they are "forever free" from making such adjustments.

A Common Argument for Fixed Exchange Rates Is That They