disadvantage of fixed exchange rate?
Proponents of a fixed rate exchange system point to a major defect of a floating exchange rate is that is responsible for creating the trade deficit. It helps eliminate the uncertainty about the value of a coin. maintains a fairly trading nation with other nations. is based on the value of gold held by a nation. leads to uncertainty about the value of goods traded internationally. I am 100% sure its not C. Please explain your reasoning behind the answer. I'm practicing questions from an online questionnaire. Thanks
Are you asking about the disadvantages of a fixed or floating rate? Your title says one, but the details seem to say the other. Http: / / en.wikipedia.org / wiki / Fixed_exchange_rate disadvantage http://en.wikipedia.org/wiki/Floating_exchange_rate You do not say to whom. When China set their currency to the dollar, the disadvantages for China are not the same as the disadvantages of the U.S. (China has a trade deficit, but the U.S. has tried to blame the deficit Chinese commercial PEG, although the evidence suggests otherwise: http://www.duke.edu/ ~ meh13/exchangerate-tradedeficit.pdf Of course, not everyone agrees: http://www.economicpopulist.org/content/china-trade-deficit-exchange-rate) You do not say what type of fixed exchange rate. One is when a country fixes its currency to the currency from another country, but the second currency is floating. http://www.frbsf.org/publications/economics/papers/2006/wp06-07bk.pdf Another is the Bretton Woods system, when all exchange rates were fixed. have disadvantages http://en.wikipedia.org/wiki/Bretton_Woods_system very different (although in both cases, governments have less freedom to drive monetary policy) As the trade deficits and exchange rates, the classical theory is simple, but does not explain the observed behavior: http http://economics.about.com/cs/analysis/a/trade_deficit.htm : / / Www.smarteconomist.com/insight/101
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