Final answer:
Countries with substantial trade volumes in their GDP may lean towards a flexible exchange rate to address domestic economic goals. However, the choice between a flexible rate and a fixed (hard peg) exchange rate involves tradeoffs and other influences like economic situations and policy objectives.
Step-by-step explanation:
When deciding between a flexible exchange rate and a fixed (hard peg) exchange rate, countries with a large fraction of GDP comprised of imports and exports might tend towards a flexible exchange rate policy. This allows the country to focus on domestic monetary policy goals such as controlling inflation and unemployment, and adapting to changes in inflation and rates of return. Conversely, a fixed exchange rate provides stability in international prices, which might benefit a heavily trade-dependent country but requires the country's monetary policy to be oriented towards maintaining the exchange rate rather than focusing on the domestic economy.
A hard peg exchange rate policy considerably reduces exchange rate fluctuations but necessitates that monetary policy primarily focuses on maintaining the peg, which can be at the expense of addressing domestic economic concerns like recession or inflation. Ultimately, the choice between these policies involves tradeoffs and may also be influenced by a country's specific economic circumstances, geopolitical factors, and policy objectives.