Proponents of fixed exchange rates would find the most support for their position in which one...

Proponents of fixed exchange rates would find the most support for their position in which one of the following empirical results regarding the relationship between exchange rate variations and the volume of international trade? (Assume that the empirical tests adequately account for other factors that influence the volume of trade.)

Select one:

a. no discernible relationship between exchange rate variations and the volume of trade

b. a negative relationship between exchange rate variations and the volume of trade

c. a mildly positive relationship between exchange rate variations and the volume of trade

d. a strongly positive relationship between exchange rate variations and the volume of trade

Expert Solution

ans: b) a negative relationship between exchange rate variations and volume of trade.

explanation: The proponents of Fixed exchange rates suggest that a fixed exchange rate means there is a certainity for foreign investors such that volume of trade will increase.

If there is empirically negative relationship between exchange rate variations and volume of trade, a possible conclusion is that an increase in floating exchange rate (variations in exchange rate) causes an uncertainity among international traders such that the volume of trade will reduce.

Thus, proponents of fixed exchange rate can suggest keeping a fixed exchange rate will reduce uncertainity and will increase volume of trade.

Rahul Sunny answered 2 years ago

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