Which of the Following Is a Disadvantage of a Free-Floating

question 34

Multiple Choice

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

• A) A free-floating exchange rate system reduces the effectiveness of a country's monetary policy and increases the variability of inflation.
• B) Under a system of free-floating exchange rates, a nation will, over the long run, experience more deficits than surpluses in its balance of payments.
• C) Fluctuating exchange rates make international transactions riskier and thus increase the cost of doing business with other countries.
• D) A free-floating exchange rate amplifies the impact of international events on an economy.