Question

Point out the merit of the flexible exchange rate.

Options

• Eliminates undervaluation of currencies only

• Eliminates overvaluation of currencies only

• Eliminates overvaluation or undervaluation of currencies

• None of the above

Answer 1

Eliminates overvaluation or undervaluation of currencies

Explanation:

The flexible exchange rate is determined by the forces of supply and demand, i.e. where demand equals supply, eliminating currency undervaluation or overvaluation.