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the strongest arguments of floating rate is that it frees macroeconomic policy from taking care of...

the strongest arguments of floating rate is that it frees macroeconomic policy from taking care of the exchange rates . this is also weakest argument.explain question and answers

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Answer #1

The statement is absolutely true that floating exchange rate system frees the macroeconomic policy to be independent. The primary reason is that the trade balances adjusts accordingly and an export/import activity will take place taking into consideration the market dynamics.

However, it also has a flip side into it. When the imports getting two expensive due to exchange rate movement then it becomes difficult for the government to control the deficit. However in a fixed rate system it is easier to not let the price go above a particular level.

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