Countries tend to be less served by a fixed exchange rate system when
A) they are small, open economies.
B) their inflation differentials are modest.
C) they are highly exposed to international capital movements.
D) their wages are quite flexible to changing market conditions.

Question

Quizplus · Accepted Answer

Countries that are highly exposed to international capital movements tend to be less served by a fixed exchange rate system because capital flows can put pressure on the exchange rate and make it difficult to maintain a fixed rate. Small, open economies (A) may benefit from a fixed exchange rate system as it can provide stability and mitigate external shocks. Modest inflation differentials (B) may also be supportive of a fixed exchange rate as it reduces the need for frequent adjustments. Flexible wages (D) can also support a fixed exchange rate as it allows for greater adjustment to changing market conditions.

Countries Tend to Be Less Served by a Fixed Exchange