Final answer:
The belief that a country with high trade-to-GDP ratios would prefer a floating exchange rate is false. Countries choose their exchange rate regimes based on various factors, including economic stability and policy objectives. Floating exchange rates can benefit countries with significant capital flows, inflation differentials, and productivity growth.
Step-by-step explanation:
It is a common misconception to believe that a country with a high share of trade in its GDP would always prefer a floating exchange rate. The statement that a country with a high share of trade in GDP will prefer a floating exchange rate is false. The choice between adopting a flexible or fixed exchange rate system depends on various factors, including the country's economic objectives, the level of development, monetary policy independence, and its vulnerability to external economic shocks.
Movements of floating exchange rates have their advantages, particularly for economies experiencing strong inflows or outflows of international financial capital, high inflation, or significant productivity growth relative to other economies. In such situations, it makes economic sense for the exchange rate to shift to maintain competitive balance and reflect changes in purchasing power. However, not all countries with high trade-to-GDP ratios will choose this route; some may adopt a fixed exchange rate for greater predictability in international transactions.