GENERAL KNOWLEDGE

Detailed explanation-1: -For example, small nations, whose financial and trade relationships are mainly with a single trading partner, often choose to adopt pegged rates. Large countries with large and diversified economies often prefer floating rates. Which of the following characterizes the operation of a managed floating exchange rate?

Detailed explanation-2: -By pegging its currency, a country can gain comparative trading advantages while protecting its own economic interests. A pegged rate, or fixed exchange rate, can keep a country’s exchange rate low, helping with exports. Conversely, pegged rates can sometimes lead to higher long-term inflation.

Detailed explanation-3: -A pegged exchange rate provides a highly visible commitment and thus raises the political costs of excessive monetary growth. Moreover, to the extent that the peg is credible, money demand is likely to be more robust, thereby reducing the inflationary consequences of a given monetary expansion.