All other things being equal, we expect fixed exchange rates to promote trade by lowering transactions costs. If that is true, then differences in prices measured in a common currency should be ________among countries with ______exchange rates than among countries with ______ rates.
A) lower; fixed; floating
B) lower; floating; fixed
C) higher; fixed; floating
D) the same; fixed; floating

Question

Quizplus · Accepted Answer

Fixed exchange rates promote trade by lowering transaction costs, which in turn reduces price differences among countries with fixed exchange rates compared to those with floating exchange rates. Therefore, we expect differences in prices measured in a common currency to be lower among countries with fixed exchange rates than among countries with floating rates.

All Other Things Being Equal, We Expect Fixed Exchange Rates