Question

multiple choice 2 points
the proponents of fixed exchange rates argue that flexible exchange rates
lead to trade protectionism.
hamper international trade because of uncertainty over what the exchange rate will be.
force a nation to use its domestic macroeconomic policies to maintain an exchange rate.
help to stabilize the economy.

Explanation:

Analyze the arguments for fixed exchange rates

Proponents of fixed exchange rates argue that flexible exchange rates introduce uncertainty into international trade. Because exchange rates fluctuate constantly under a flexible system, businesses face unpredictable costs and revenues when trading across borders, which can hamper international trade.

Evaluate the given options

• Option 1: Trade protectionism is not the primary argument against flexible rates.
• Option 2: This matches the core argument that uncertainty over future exchange rates hampers international trade.
• Option 3: It is fixed exchange rates, not flexible ones, that force a nation to use domestic macroeconomic policies to maintain a target rate.
• Option 4: Proponents of fixed rates argue that flexible rates cause instability rather than stabilization.

Answer:

• lead to trade protectionism.
• hamper international trade because of uncertainty over what the exchange rate will be. (Correct answer)
• force a nation to use its domestic macroeconomic policies to maintain an exchange rate.
• help to stabilize the economy.