Which of the following is not a merit of the flexible exchange rate system?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Exchange rates are prone to speculative attack on a currency.
Under a flexible (floating) exchange rate system, the value of a currency is determined by market forces of demand and supply.
Merits of a flexible exchange rate system:
-
Movements in the exchange rate automatically correct Balance of Payments surpluses or deficits.
-
Countries enjoy independence in monetary policy decisions.
-
No need to maintain large foreign exchange reserves.
Option 1: Exchange rates are prone to speculative attack on a currency is a demerit of Fixed Exchange Rate system.