A Major Drawback of a Floating Exchange Rate Is The

question 262

Multiple Choice

A major drawback of a floating exchange rate is the:

• A) opportunity cost associated with the accumulation of foreign exchange reserves.
• B) uncertainty about the value of goods traded internationally.
• C) increased discipline on monetary policy.
• D) distorted incentives for the normal flow of imports and exports.

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Definitions:

Marginal Utility

The additional satisfaction or utility that a consumer derives from consuming an additional unit of a good or service.

Price of Apple

The cost at which an apple, as a fruit or as a company's stock (Apple Inc.), can be purchased, depending on context.

Price of Orange

Refers to the cost to purchase a single unit or a specified amount of oranges in a given market.

Substitution Effect

The economic principle that as prices rise or income decreases, consumers replace more expensive items with less costly alternatives.