Question

Fictoria has recently become a republic. Which of these items indicates that Fictoria will follow a fixed exchange rate system?

A.
The system will encourage speculators.
B.
The currency price is set by the free market based on supply and demand.
C.
The government entirely determines the rate.
D.
The system will keep away risk-averse foreign investors.
E.
The system will automatically solve all balance of payment problems.

Answer 1

The correct answer is A. The system will encourage speculators.

Step-by-step explanation:

The fixed exchange rate monetary system is one by which a country sets the value of its currency to the value of another foreign currency, usually from economically stable countries, or to another stable value in the long term, such as the price of gold oil or other raw materials.

In this way, these countries guarantee the stability of their currency, at the cost of losing the ability to lose the possibility of developing an independent monetary policy. In addition, these types of policies tend to encourage economic speculation, which invests in overvalued currencies obtaining higher profits.