When a nation chooses to fix or float, it should consider:
A) only its domestic banks, importers, and exporters.
B) only whether it has a great deal of economic integration.
C) only whether it has similar circumstances in terms of demand or supply shocks with its trading partners.
D) both the level of economic integration and the similarity of demand or supply shocks.

Question

Quizplus · Accepted Answer

When a nation chooses to fix or float its exchange rate, it should consider both the level of economic integration and the similarity of demand or supply shocks with its trading partners. It is important to consider the level of economic integration because if a country has a high level of trade with its partners, it may become difficult to maintain a fixed exchange rate. Similarly, if a country has similar demand or supply shocks with its trading partners, it may be better to fix its exchange rate to avoid fluctuations in the exchange rate causing economic instability. Therefore, both factors need to be considered before deciding to fix or float the exchange rate.

When a Nation Chooses to Fix or Float, It Should