Final answer:
Countries prefer fixed exchange rates for the predictability and stability they provide in international trade and economic policies, whereas floating exchange rates are favored for their flexibility and adaptability to economic conditions. The decision between the two depends on a country's economic goals and circumstances.
Step-by-step explanation:
Some countries might prefer fixed exchange rates because it stabilizes the value of currency and can make international trade more predictable. Fixed exchange rates serve as an anchor for macroeconomic policies and limit the ability of politicians to manipulate monetary policies for electoral gain. However, they can also lead to potential losses in output or employment and can restrict the country’s ability to adjust to external economic shocks.
On the other hand, floating exchange rates are often favored for their flexibility. Proponents like the economist Milton Friedman argue that with stable government policies, floating rates could lead to more predictable inflation and interest rates. Floating exchange rates allow countries to adjust to economic conditions naturally and prevent the need for large forex interventions.
Each country must weigh these pros and cons when deciding on its exchange rate regime, taking into account its specific economic realities and goals. There is no one-size-fits-all answer to which kind of exchange rate is best, as this depends on a range of factors including the stability of the country's economy and its integration with global markets.