Question

It is usually optimal for a small economy without natural resources to adopt a floating exchange rate system, because it is beneficial to be able to import raw materials for cheap when E* grows. Notice: E* is to be intended as the price of foreign currency - for example, in the UK the market exchange rate with the US Dollar is 1$=BP E* True False

Answer 1

The statement is true. As an example, Singapore had managed float where the exchange rate was allowed to change. The economy had fewer natural resources so that it started using exports as its growth orientation. It needed to import important raw material and machine parts, In contrast, Hong Kong had pegged exchange rate which proved to be a disadvantage for the economy. The benefit of a floating exchange rate is that when it depreciates, exports can be increased and more foreign reserves are accumulated. When exchange rate appreciates, imports become cheaper and import billl is reduced.