When exchange rates are volatile:
A) firms are assured that they will be able to earn profits from currency swings.
B) firms engage in more trade.
C) trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll.
D) international economic activity is increased.

Question

Quizplus · Accepted Answer

When exchange rates are volatile, trade and cross-border financial and labor flows are reduced due to increased uncertainty and transaction costs. Firms may become hesitant to engage in international trade, which can have a negative impact on economic activity.

When Exchange Rates Are Volatile