The flexibility of floating rates may generate the problem of
A) Inflationary bias
B) Deflationary bias
C) Continuous depreciation
D) Both a and c

Question

Quizplus · Accepted Answer

The flexibility of floating rates, which allows the exchange rate to adjust to market forces, can generate the problem of inflationary bias as an overvalued currency can lead to higher prices, and continuous depreciation can lead to inflationary pressures. It can also lead to continuous depreciation if market forces cause the exchange rate to constantly decrease. Therefore, both options A and C are correct.

The Flexibility of Floating Rates May Generate the Problem of