With floating exchange rates, the negative effects of international trade shocks on internal balance are worsened by the effects of the resulting change in the exchange rate.

Question

Quizplus · Accepted Answer

With floating exchange rates, exchange rates can adjust to international trade shocks, potentially mitigating the negative effects on internal balance by making exports cheaper and imports more expensive, thus helping to restore equilibrium.

With Floating Exchange Rates, the Negative Effects of International Trade