Identify the correct statement.
A)International capital-flow shocks are likely to be less disruptive under fixed exchange-rates.
B)If a country is likely to be buffeted mainly by internal shocks, the country should choose a fixed exchange-rate.
C)The effects of shocks under floating exchange-rates depend on whether interventions are sterilized.
D)International trade shocks can be countered by adopting a fixed exchange rate that helps to improve price competitiveness of the country's products.

Question

Quizplus · Accepted Answer

Fixed exchange-rate can help to stabilize the economy and provide certainty for businesses and investors but it is not effective in dealing with external shocks such as international capital-flow shocks or international trade shocks. Instead, a floating exchange-rate system is more appropriate for dealing with such shocks. However, if a country is likely to be buffeted mainly by internal shocks, such as inflation or unemployment, a fixed exchange-rate system may be appropriate as it provides stability and discipline in the form of constraint on monetary and fiscal policies.

Identify the Correct Statement