Question

Which of the following is a potential benefit of a fixed exchange rate system?

• A. Exchange rate stability encourages international trade and investment
• B. Currency values fluctuate unpredictably
• C. Governments have no control over their monetary policies
• D. Inflation rates become highly volatile

Hint:

A fixed exchange rate system reduces the risks associated with currency fluctuations, fostering confidence in international trade and investment.

Answer 1

The Correct Option is A

A fixed exchange rate system refers to a situation where a country's currency value is tied to another major currency or a basket of currencies, or is fixed to the price of a commodity like gold.
One of the key benefits of a fixed exchange rate system is that it provides exchange rate stability, which is crucial for international trade and investment.
With a stable exchange rate, businesses and investors are more confident about the value of foreign exchange transactions and can plan their operations and investments accordingly.
On the other hand, if exchange rates fluctuate unpredictably, as suggested in option 2, it can create uncertainty in international trade.
Governments do have some control over monetary policies even in a fixed exchange rate system, making option 3 incorrect. Similarly, option 4 is incorrect because a fixed exchange rate system helps control inflation by maintaining stable currency values.