Which of the following is a DEMERIT of flexible exchange rate system?

• It does not encourage venture capital
• There is no requirement of government to hold 100% gold reserves.
• There is no stability as the exchange rate keeps fluctuating according to demand.
• It encourages international trade beyond the capacity of nation.

Only 3

Flexible exchange rate system is the system where the exchange rate is determined by the market forces of demand and supply and there is no government intervention.

The following are the merits of the same:

• It solves the problem of overvaluation/undervaluation of currencies
• There is no requirement of government to hold 100% of gold reserves
• It encourages the venture capital

The following are the demerits of the same:

1. There is no stability. Flexible exchange rate keeps on fluctuating according to demand and supply of the currency. 
2. Due to fluctuating currency exchange rate,  foreign trade is discouraged among the nations.