Which one of the following is a disadvantage of a fixed exchange rate system:

Question

Quizplus · Accepted Answer

In a fixed exchange rate system, the government has to actively intervene in the currency market to maintain the fixed exchange rate. This means that they might have to manipulate the value of the currency, which can have adverse effects on the economy, such as inflation or loss of international competitiveness. Importers and exporters are also not insulated from currency fluctuations, as their transactions are still subject to exchange rate risk if the fixed exchange rate becomes unsustainable. Therefore, C is the correct answer as it highlights a key disadvantage of a fixed exchange rate system. Choices A and D are incorrect as they suggest advantages of a fixed exchange rate system, while B is not relevant to the question.

Which One of the Following Is a Disadvantage of a Fixed