Lower transaction costs are a benefit of fixed exchange rates. Therefore, relative prices in two trading nations linked by fixed exchange rates should:
A) experience more price divergence.
B) experience more price convergence.
C) have less arbitrage and more speculation.
D) have lower costs of production.

Question

Quizplus · Accepted Answer

When two trading nations have fixed exchange rates, it becomes easier for them to engage in international trade as transaction costs are lower. This leads to increased trade and competition, ultimately leading to more price convergence between the two nations. Therefore, option B is the correct answer. Options A, C, and D are not related to the effect of fixed exchange rates on relative prices.

Lower Transaction Costs Are a Benefit of Fixed Exchange Rates