Chapter 17.2

Question 1

Effect of fixed exchange rates on degrees of certainty for stakeholders

Answer 1

High degree of certainty

Question 2

Effect of floating exchange rates on degrees of certainty for stakeholders

Answer 2

High degree of uncertainty

Question 3

Effect of fixed exchange rates on foreign currency reserves

Answer 3

Central banks need to have a sufficient amount of foreign currency reserves

Question 4

Effect of floating exchange rates on foreign currency reserves

Answer 4

There is no need for central banks to hold foreign currency reserves

Question 5

Effect of fixed exchange rates on current account imbalances

Answer 5

No easy method to correct imbalances

Question 6

Effect of floating exchange rates on current account imbalances

Answer 6

Excess demand and supply automatically adjust

Question 7

Effect of fixed exchange rates on inflation

Answer 7

Makes the use of contractionary policies necessary which can create recession

Question 8

Effect of floating exchange rates on inflation

Answer 8

Correction of inflation through depreciation could create cost-push inflation

Question 9

Effect of fixed exchange rates on flexibility offered to policy-makers

Answer 9

Don’t offer any flexibility to policy-makers

Question 10

Effect of floating exchange rates on flexibility offered to policy-makers

Answer 10

A lot of flexibility is given to policy-makers to pursue policies according to domestic priorities

Question 11

Effect of fixed exchange rates on speculation

Answer 11

Speculation is limited except for possible devaluations or revaluations

Question 12

Effect of floating exchange rates on speculation

Answer 12

Currency speculation can be destabilizing