Name two exchange rate regimes and provide a brief advantage and disadvantage of each.

• A. Floating regime offers monetary autonomy but faces exchange-rate volatility
• B. Floating regime offers stability but loses monetary independence
• C. Fixed regime offers monetary autonomy but causes exchange-rate volatility
• D. Fixed regime offers stability but requires large reserves

Answer: (A)

The main idea here is how exchange rate regimes trade off two things: monetary policy autonomy and exchange-rate stability. In a floating regime, the exchange rate is allowed to move with market forces, so the central bank can conduct monetary policy to priority domestic goals like controlling inflation or supporting growth—this is monetary autonomy. But because the rate isn’t pegged, it can fluctuate a lot, leading to exchange-rate volatility as capital flows and market expectations push the currency around.

That description matches the chosen statement: it accurately captures the floating regime’s advantage (monetary autonomy) and its disadvantage (volatility). The other options mix up those trade-offs for either floating or fixed regimes—fixed regimes do offer stability but require large reserves and typically constrain monetary policy, while a floating regime does not provide the stability associated with a peg.