Final answer:
The purpose of creating the ERM was to stabilize exchange rates within Europe, making trade easier and minimizing economic uncertainties. It was not intended to let exchange rates float more freely, nor to prevent currency appreciation. The ERM helped prepare countries for entry into the Eurozone with stable exchange conditions.
Step-by-step explanation:
The purpose of creating the European Exchange Rate Mechanism (ERM) was to stabilize exchange rates among European countries in order to facilitate easier trade and reduce economic risk and uncertainty. This mechanism was aimed at maintaining exchange rates within a narrow band to minimize fluctuations that could disrupt trading activities, therefore the correct answer to the question is not to create barriers to trade, let exchange rates float more freely, or base trade and investment on comparative advantage, nor was it intended to prevent currencies from appreciating. Instead, it primarily served as a precursor to the Euro and helped to ensure that member states had stable exchange rates before joining the Eurozone.
When trade is a substantial part of a nation's economic activities, fixed exchange rates, like those aimed for in the ERM, are typically seen as beneficial as they minimize trade flow disruptions caused by exchange rate fluctuations. Proponents of floating exchange rates, however, admit that while rates may fluctuate, such fluctuations can be mitigated by central banks focusing on controlling inflation and avoiding recessions through stable and moderate interest rates.