Proponents of freely floating exchange rates maintain that:
A) Central banks can easily modify fluctuations in exchange rates
B) The system allows policy makers freedom in pursuing domestic economic goals
C) Inelastic demand schedules prevent large fluctuations in exchange rates
D) Inelastic supply schedules prevent large fluctuations in exchange rates

Question

Quizplus · Accepted Answer

Proponents of freely floating exchange rates argue that this system allows policy makers to pursue their domestic economic goals without being constrained by exchange rate targets or fixed exchange rates. This means that they have more freedom to implement monetary policy that could stimulate economic growth or combat inflation, among other things. Option A is incorrect because freely floating exchange rates mean that central banks cannot easily modify fluctuations as they are determined by market forces. Options C and D are also incorrect because the inelasticity of supply or demand schedules is not enough to prevent large fluctuations in exchange rates if there is a significant shift in market sentiment or other macroeconomic factors.

Proponents of Freely Floating Exchange Rates Maintain That