One argument favoring a fixed-exchange-rate system is that it:
A) allows monetary policy to be used for stabilizing output and prices.
B) reduces exchange-rate uncertainty, thereby promoting more international trade.
C) leads to excessive growth of the money supply.
D) requires no actions on the part of the central bank to implement.

Question

Quizplus · Accepted Answer

A fixed-exchange-rate system reduces exchange-rate uncertainty, which promotes more international trade. This is because businesses are hesitant to engage in international trade when they are uncertain about the exchange rate at which they will be able to convert their payments into their domestic currency. By providing a stable exchange rate, a fixed-exchange-rate system encourages more trade and investment, which can lead to increased economic growth. However, this can also lead to trade imbalances if the exchange rate is not properly managed.

One Argument Favoring a Fixed-Exchange-Rate System Is That It