A potential disadvantage of freely floating exchange rates is that there would
A) exist excessive amounts of hedging in the foreign exchange markets.
B) be a lack of incentive to initiate exchange arbitrage.
C) be excessive amounts of destabilizing speculation.
D) exist a devaluation bias in the exchange markets.

Question

Quizplus · Accepted Answer

Freely floating exchange rates can encourage destabilizing speculation, leading to increased volatility in exchange rates. This can potentially harm the competitiveness of firms in global markets, leading to economic instability.

A Potential Disadvantage of Freely Floating Exchange Rates Is That