Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, inflation in one country can more easily transmit to another due to the stable exchange rates, which do not adjust to offset price level differences. Similarly, unemployment can have a greater impact across countries with fixed exchange rates because the lack of currency adjustment can lead to economic conditions spilling over more directly.

Consider Two Countries That Trade with Each Other, Called X