With respect to each of the following issues, explain whether floating or fixed exchange-rates would be better and why it would be better.a. Internal monetary shocksb. External macroeconomic shocksc. A need for diversity in macroeconomic goals and policies across countries
What will be an ideal response?
POSSIBLE RESPONSE:
a. For internal monetary shocks, fixed exchange rates would be better because the intervention to defend the fixed rate tends to reverse the shock and its effects. With a floating rate the resulting change in the exchange-rate would magnify the domestic effects of the monetary shock.
b. For external macroeconomic shocks, floating exchange rates would be better because the exchange rate would tend to adjust to insulate the domestic economy. In the fixed exchange rate system, the country would tend to import the external shock.
c. Floating rates allow goals and polices to differ across countries. Fixed rates require coordination or consistency of goals and policies across countries. So, to achieve different macroeconomic goals and policies across various countries, floating exchange rates should be adopted.
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