Question

With flexible exchange rates, instability may occur because

a.inflation may occur if the economy is at or near full-employment and the dollar depreciates making imports more expensive.
b.domestic industries that produce goods for export may at times be stimulated and at other times be depressedue to fluctuations in the exchange rate.
c.both inflation may occur if the economy is at or near full-employment and the dollar depreciates making imports more expensive and domestic industries that produce goods for export may at times be stimulated and at other times be depressed due to fluctuations in the exchange rate.

Answer 1

With flexible exchange rates, instability may occur due to both inflation and fluctuations in the exchange rate. Inflation may occur if the economy is at or near full-employment, and the dollar depreciates, making imports more expensive.

Step-by-step explanation:

With flexible exchange rates, instability may occur due to both inflation and fluctuations in the exchange rate. Inflation may occur if the economy is at or near full-employment, and the dollar depreciates, making imports more expensive. Additionally, domestic industries that produce goods for export may be stimulated or depressed at different times due to fluctuations in the exchange rate.

For example, if the dollar depreciates, it becomes more expensive for consumers to purchase imported goods. This can lead to inflation as prices for imported goods increase. Furthermore, fluctuations in the exchange rate can impact the competitiveness of domestic industries that rely on exports. When the exchange rate is favorable, these industries may experience increased demand and profits. However, when the exchange rate fluctuates unfavorably, they may face decreased demand and losses.

Overall, both inflation and fluctuations in the exchange rate can create instability in the economy, affecting both domestic and international trade.