The effects of a decrease in export demand
A) is a powerful argument in favor of fixed rates.
B) is a powerful argument in favor of flexible rates.
C) shows the difficulties in determining which exchange rate is better.
D) is a powerful argument in favor of fixed rates only in the short run.
E) is a powerful argument in favor of fixed rates only in the long run.

Question

Quizplus · Accepted Answer

A decrease in export demand would typically result in a decrease in the demand for a country's currency, leading to a depreciation of the currency in a flexible exchange rate regime. In contrast, in a fixed exchange rate regime, the central bank may need to intervene to maintain the fixed rate, potentially leading to a decrease in foreign exchange reserves or a need to raise interest rates. Therefore, a flexible exchange rate regime is better suited to deal with external shocks such as a decrease in export demand.

The Effects of a Decrease in Export Demand