Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Flexible exchange rates promote stability in the short run and reduce speculative activities.
B
They allow for automatic adjustment to economic shocks, facilitate international trade, and can enhance monetary policy effectiveness.
C
Flexible exchange rates eliminate the need for government intervention in currency markets.
D
They solely benefit speculators at the expense of long-term economic stability.
Understanding the Answer
Let's break down why this is correct
Answer
Flexible exchange rates are beneficial because they allow a currency's value to change based on supply and demand in the market. This means that if a country's economy is doing well, its currency can strengthen, making it more valuable. For example, if many investors want to buy a country’s goods, they will need that country’s currency, driving its value up. Additionally, flexible exchange rates can help countries adjust to economic shocks, like changes in trade or investment flows, without needing government intervention. This system also encourages speculation, where investors can make profits by predicting how currencies will move, adding dynamism to the currency markets.
Detailed Explanation
Flexible exchange rates help economies adjust automatically to changes. Other options are incorrect because Some might think flexible rates make things stable, but they can actually cause short-term ups and downs; It's a common belief that flexible rates mean no government action is needed.
Key Concepts
advantages of flexible rates
exchange rate determination
speculation in currency markets
Topic
Flexible Exchange Rates
Difficulty
hard level question
Cognitive Level
understand
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