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IBUS 401 Exam 2 (2025/2026 Edition) | Verified
Exam Questions & Correct Answers | Detailed
Solutions | A+ Graded
fixed exchange rate system
Ans: exchange rates are either held constant or allowed to fluctuate only
within very narrow boundaries, central bank can reset a fixed exchange
rate by devaluing or reducing the value of the currency adjacent other
currencies, central bank can also revalue or increase the value of its
currency against other currencies
advantages of fixed exchange rates
Ans: insulate country from risk of currency appreciation, allows firms to
engage in direct foreign investment without currency risk
disadvantages of fixed exchange rates
Ans: risk that government will alter value of currency, country and MNC
may be more vulnerable to economic conditions in other countries
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freely floating exchange rate system
Ans: exchange rates are determined by markets forces without
government intervention
advantages of a freely floating system
Ans: country is more insulated from inflation of other countries, from
unemployment of other countries, does not require central bank to
maintain exchange rates within specified boundaries
disadvantages of a freely floating exchange rate system
Ans: can adversely affect a country that has high unemployment and
high inflation
managed float exchange rate system
Ans: governments sometimes intervene to prevent they currencies from
moving too far in a certain direction
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pegged exchange rate system
Ans: home currency value is pegged to one foreign currency or to an
index of currencies
what are some limitations of a pegged exchange rate?
Ans: may attract foreign investment because exchange rate is expected
to remain stable, weak or economic or political conditions can cause
firms and investors to question whether the peg will be broken
currency boards used to peg currency values
Ans: a system for pegging the value of the local currency to some other
specified currency, the board must maintain currency reserves for all the
currency that it has printed
interest rates of pegged currencies
Ans: interest rate will move in tandem with the interest rate of the
currency to which it is tied
IBUS 401 Exam 2 (2025/2026 Edition) | Verified
Exam Questions & Correct Answers | Detailed
Solutions | A+ Graded
fixed exchange rate system
Ans: exchange rates are either held constant or allowed to fluctuate only
within very narrow boundaries, central bank can reset a fixed exchange
rate by devaluing or reducing the value of the currency adjacent other
currencies, central bank can also revalue or increase the value of its
currency against other currencies
advantages of fixed exchange rates
Ans: insulate country from risk of currency appreciation, allows firms to
engage in direct foreign investment without currency risk
disadvantages of fixed exchange rates
Ans: risk that government will alter value of currency, country and MNC
may be more vulnerable to economic conditions in other countries
,2|Page
freely floating exchange rate system
Ans: exchange rates are determined by markets forces without
government intervention
advantages of a freely floating system
Ans: country is more insulated from inflation of other countries, from
unemployment of other countries, does not require central bank to
maintain exchange rates within specified boundaries
disadvantages of a freely floating exchange rate system
Ans: can adversely affect a country that has high unemployment and
high inflation
managed float exchange rate system
Ans: governments sometimes intervene to prevent they currencies from
moving too far in a certain direction
, 3|Page
pegged exchange rate system
Ans: home currency value is pegged to one foreign currency or to an
index of currencies
what are some limitations of a pegged exchange rate?
Ans: may attract foreign investment because exchange rate is expected
to remain stable, weak or economic or political conditions can cause
firms and investors to question whether the peg will be broken
currency boards used to peg currency values
Ans: a system for pegging the value of the local currency to some other
specified currency, the board must maintain currency reserves for all the
currency that it has printed
interest rates of pegged currencies
Ans: interest rate will move in tandem with the interest rate of the
currency to which it is tied
