A potential limitation of freely floating exchange rates is that:
A) Countries require a larger amount of international reserves than otherwise
B) Countries are unable to initiate economic policies to combat unemployment
C) Exchange rates may experience wide and frequent fluctuations
D) Demand tends to be highly sensitive to price movements

Question

Quizplus · Accepted Answer

Freely floating exchange rates can lead to wide and frequent fluctuations in exchange rates, which can create uncertainty for businesses and investors. This volatility can make it difficult for countries to plan and execute economic policies, as changes in exchange rates can impact trade, investment, and inflation. Additionally, sudden swings in exchange rates can negatively affect businesses that rely on exports or imports, as well as consumers who may face higher prices for imported goods.

A Potential Limitation of Freely Floating Exchange Rates Is That