In the long run,under a system of flexible exchange rates
A) countries' gold revenues will be proportional to their trade balances.
B) the exchange rate between any two currencies will reflect price level differences between the two countries.
C) currency markets will no longer play an important role in international trade.
D) most countries will have balance-of-trade surpluses.
E) the foreign currency reserves of all countries will approach zero.

Question

Quizplus · Accepted Answer

Under a system of flexible exchange rates, the exchange rate between any two currencies will reflect price level differences between the two countries. This is because flexible exchange rates are determined by supply and demand in the foreign exchange market, which is influenced by factors such as inflation rates, interest rates, and economic growth. As a result, exchange rates will adjust to reflect the relative prices of goods and services in different countries, making exports cheaper in countries with lower prices and imports more expensive.

In the Long Run,under a System of Flexible Exchange Rates