In comparison to a floating exchange rate regime, a fixed exchange rate system is characterized by:
A)smoother trade balance adjustments.
B)increased destabilizing effects of exchange rate speculation.
C)greater autonomy in terms of monetary policy.
D)higher monetary discipline.
E)greater exchange rate uncertainty and volatility.

Question

Quizplus · Accepted Answer

The case for fixed exchange rates rests on arguments about monetary discipline, speculation, uncertainty, and the lack of connection between the trade balance and exchange rates. The need to maintain fixed exchange rate parity ensures that governments do not expand their money supplies at inflationary rates. Advocates of fixed rates argue that governments all too often give in to political pressures and expand the monetary supply far too rapidly, causing unacceptably high price inflation. A fixed exchange rate regime would ensure that this does not occur.

In Comparison to a Floating Exchange Rate Regime, a Fixed