What is the difference between fixed and floating exchange rates?

A. Fixed exchange rates are more volatile than floating rates.
B. Floating exchange rates are more volatile than fixed rates.
C. The currency board only converts to a floating exchange rate.
D. Usually, the floating exchange rate is set by law, making changes to the exchange rate very costly to governments.

Fixed exchange rates are set by governments and remain constant, while floating exchange rates fluctuate based on market forces. The choice between fixed and floating rates is a critical policy decision in international finance.

Explanation:

Fixed exchange rates are set and maintained by governments, remaining constant unless officially changed. On the other hand, floating exchange rates are determined by market forces, fluctuating based on supply and demand.

While fixed exchange rates aim to provide stability for international trade and investment, floating exchange rates can be more volatile due to market influences.

The choice between fixed and floating exchange rates is a crucial policy decision in international finance, impacting factors like inflation, monetary autonomy, and overall economic stability.

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