Final answer:
Bert must consider stability and predictability in international trade against the ability to respond to economic conditions when choosing an exchange rate system. A fixed system offers stability but limits monetary policy flexibility, while a flexible system allows for adjustment to economic changes but introduces exchange rate volatility.
Step-by-step explanation:
Bert, as the president of a new nation, needs to consider several factors when deciding between a fixed and a flexible exchange rate system. A fixed exchange rate, also known as a hard peg, provides stability in international trade, reduces the risk and uncertainty in the economy, and can help to control inflation by anchoring the nation's currency to a more stable and widely accepted foreign currency. However, maintaining a hard peg can be expensive, as it requires large reserves of foreign currency to defend the peg, and it may limit a country's ability to react to economic shocks and adjust its monetary policy accordingly.
On the other hand, a flexible exchange rate, or a floating system, allows for automatic adjustment of the currency value based on supply and demand dynamics in the foreign exchange market. This can offer a cushion against external economic shocks and allows monetary policy to be more focused on domestic goals like controlling inflation and unemployment. Yet, such flexibility can lead to unpredictable exchange rate movements, potentially causing volatility which can deter international investment and disrupt the export industries.
A soft peg may create additional volatility as markets try to anticipate government intervention. Furthermore, rapid movements from a strong to a weak exchange rate can harm a nation's banking sector, while movements in the opposite direction may cripple exports. Countries with large amounts of imports and exports relative to their GDP might lean towards a fixed rate to minimize exchange rate risks.