Question

Bert has become the president of a new nation. He is deciding between adopting a fixed versus flexible exchange rate system. What are the strengths and weaknesses he must consider when making a decision.

Answer 1

A country for which imports and exports comprise a large fraction of the GDP is more likely to adopt a flexible exchange rate system.

Step-by-step explanation:

A country for which imports and exports comprise a large fraction of the GDP is more likely to adopt a flexible exchange rate system.

A flexible exchange rate system allows the exchange rate to change with inflation and rates of return. This can be beneficial for a country with a large amount of imports and exports, as it allows the exchange rate to adjust to market conditions and maintain competitiveness.

On the other hand, a fixed exchange rate system, also known as a hard peg, may create more stability but can limit a country's ability to adjust to economic changes. Fixed exchange rates require intervention from the government to maintain the set exchange rate, which may not be feasible or effective for a country heavily reliant on imports and exports.