Question:medium
Identify which of the following is not one of the merits of a fixed exchange rate system:
In the light of the given statements, choose the correct alternative from the following:
Identify which of the following is not one of the merits of a fixed exchange rate system:
In the light of the given statements, choose the correct alternative from the following:
Show Hint
Fixed exchange rates provide stability but can lead to currency misvaluation due to lack of market adjustment.
Updated On: Jan 13, 2026
- Ensures stability in exchange rate.
- Possibility of under or overvaluation of foreign currency.
- Prevents speculations in the foreign exchange market.
- Coordination of macroeconomic policies becomes convenient.
Show Solution
The Correct Option is B
Solution and Explanation
A fixed exchange rate system provides stable exchange rates (Option A) and deters speculation in the foreign exchange market (Option C), thereby enhancing the predictability of trade and investment. It also facilitates macroeconomic policy coordination (Option D). Nevertheless, a drawback of fixed exchange rates is the potential for currency undervaluation or overvaluation (Option B), as the fixed rate might not accurately reflect the currency's true global market value.
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