International trade under a floating exchange rate system

Question

Quizplus · Accepted Answer

The floating exchange rate system exposes businesses engaged in international trade to risks associated with fluctuating exchange rates. When exchange rates change, businesses may face difficulties in accurately pricing their products or services and predicting their profit margins. This may lead to losses or gains depending on the direction of the exchange rate movement. Speculators in the currency markets may help stabilize exchange rates, but they cannot eliminate the risks inherent in the floating exchange rate system. Option A is incorrect because while speculators may contribute to the stability of exchange rates, they can also exacerbate volatility. Option B is also incorrect because there is no evidence that the volume of trade has declined significantly due to problems associated with the floating exchange rate system. Option D is incorrect because though there have been instances of currency crisis, it is not true that wild runs on currencies on the verge of devaluation are a regular feature of the floating exchange rate system.

International Trade Under a Floating Exchange Rate System