CIMA BA1 · Chapter 3 · Question 7 of 10
Which of the following is usually regarded as an advantage of a fixed exchange rate system compared with a freely floating system?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) It gives importers and exporters greater certainty about future exchange rates
Explanation
A fixed rate reduces exchange rate uncertainty for traders and investors. However, the authorities must hold reserves to defend the rate and must often direct interest rates at maintaining the peg; automatic correction of imbalances is a claimed advantage of floating rates.
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