The greater are foreign tradable goods price fluctuations,the more likely that authorities will choose a ________ exchange rate system.

Question

Quizplus · Accepted Answer

In a floating exchange rate system, the exchange rate is determined by market forces, which allows for the necessary adjustment in response to foreign tradable goods price fluctuations. A fixed exchange rate system, on the other hand, requires government intervention to maintain the parity between the domestic and foreign currencies, which can be difficult to sustain in the face of significant price fluctuations. A crawling peg system is a hybrid of the two, and while it allows for some exchange rate flexibility, it may not provide enough adjustment in the face of large price swings. A dual exchange rate system, where different exchange rates are used for different purposes, is not particularly relevant to this scenario.

The Greater Are Foreign Tradable Goods Price Fluctuations,the More Likely