Countries A and B are important trading partners. Country A is in a recession. Country B will be better insulated from the recession originating in country A if country _____ has a _____ exchange rate system.

Question

Quizplus · Accepted Answer

If country B has a floating exchange rate system, its currency value will adjust according to market forces based on supply and demand. This means that if country A's recession causes its currency value to decrease, country B's currency will not be constrained to move with it. On the other hand, if country A has a fixed exchange rate system, its currency value will not adjust as easily, and this could create spillover effects for country B. Therefore, having a floating exchange rate system would allow country B to better insulate itself from the recession in country A.

Countries a and B Are Important Trading Partners