Why would a country adopt floating exchange rates?

Question

Quizplus · Accepted Answer

Adopting floating exchange rates allows a government to pursue its own monetary policies without being constrained by a fixed exchange rate. With a floating exchange rate, the currency value is determined by the market, rather than being fixed to another currency, which gives the government more flexibility in managing its currency and economy.

Answer: B
 Floating exchange rates reduce the likelihood of abrupt changes in currency values because they allow the market to determine the exchange rate based on supply and demand for a particular currency. This means that the exchange rate can adjust gradually to changes in economic conditions, rather than being fixed at a level that may not be sustainable in the long term.

Answer: C
 Floating exchange rates can be beneficial for borrowers of foreign funds because they allow for greater flexibility in the exchange rate, which can reduce the risk of currency fluctuations affecting repayments. For example, if a borrower takes out a loan denominated in a foreign currency, a floating exchange rate can help to mitigate the risk of the currency appreciating and making the loan more expensive to repay.

Answer: D
 Floating exchange rates do not necessarily make international trade less risky, as they can still be subject to fluctuations that may affect the value of exports or imports. However, floating exchange rates can help to reduce the risk of a country being forced to maintain an unsustainable fixed exchange rate in order to support trade, which can lead to economic imbalances over time.

Why Would a Country Adopt Floating Exchange Rates