International trade shocks are more disruptive with fixed exchange rates than with floating exchange rates.

Question

Quizplus · Accepted Answer

When exchange rates are fixed, countries cannot adjust their exchange rates to offset the impact of international trade shocks. This can result in more severe economic disruptions, including higher inflation and lower GDP growth. In contrast, floating exchange rates allow for automatic adjustments in response to changes in international trade flows, which can help to cushion the impact of trade shocks.

International Trade Shocks Are More Disruptive with Fixed Exchange Rates