Which of the Following Is a Drawback of a Floating

question 15

Multiple Choice

Which of the following is a drawback of a floating exchange-rate system?

• A)Inflation is fully transmitted from one country having a higher rate of inflation to another one having a relatively lower rate.
• B)Monetary policy is ineffective in raising aggregate demand since it cannot be directed toward achieving internal balance.
• C)Overshooting of exchange rates may cause excessive resource shifts into and out of trade oriented industries.
• D)Adverse foreign trade shocks are especially damaging since any intervention by the central bank adds to the recession.

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Definitions:

Representativeness Bias

A cognitive bias where individuals incorrectly assess the likelihood of an event based on how closely it resembles their stereotypes of a category.

Lack-of-participation Error

A common mistake in decision-making processes, where not all relevant parties are involved, leading to suboptimal outcomes.

Escalating Commitment

A behavioral phenomenon where an individual or group continues to invest in a decision despite evidence of its ineffectiveness.

Confirmation Error

A cognitive bias that involves focusing on information that confirms one's preconceptions and ignoring information that contradicts them.