Proponents of a freely floating exchange rate system maintain that it is superior to a fixed exchange rate system because it
A) keeps inflation under control.
B) provides a simple and clear exchange rate target.
C) provides continuous adjustment in the balance of payments.
D) helps prevent disorderly exchange rate movements that can disrupt trade.

Question

Quizplus · Accepted Answer

Proponents of a freely floating exchange rate system argue that it provides continuous adjustment in the balance of payments, allowing for market forces to determine the exchange rate. This can make the system more flexible and adaptable to economic changes compared to a fixed exchange rate system where the exchange rate is set by a government or central bank. Additionally, a freely floating exchange rate can help prevent disorderly exchange rate movements that can disrupt trade, as market forces will naturally adjust the exchange rate based on supply and demand. However, a freely floating exchange rate may not provide a simple and clear exchange rate target like a fixed exchange rate system. It also does not necessarily keep inflation under control, as inflation can be affected by a variety of factors beyond just the exchange rate.

Proponents of a Freely Floating Exchange Rate System Maintain That