2025 NES Business Studies Practice Test – Complete Exam Prep

Maintaining a fixed exchange rate can lead to potential trade imbalances. This is because a fixed exchange rate does not allow the currency to adjust according to the market forces of supply and demand. As a result, if a country's currency is fixed to another currency that is appreciating, its own goods may become relatively more expensive for foreign buyers, leading to a decline in exports. Conversely, if the domestic currency is undervalued, imports may become cheaper, resulting in a surge in imports. This discrepancy can create imbalances in trade, as the economy may face a higher trade deficit due to inflated imports and reduced export competitiveness.

In the context of the other options, while maintaining a fixed exchange rate may contribute to reduced volatility in trade balances and promote currency stability, these outcomes do not directly address the risks associated with potential trade imbalances. Increased inflation rates can occur due to domestic monetary policy adjustments, but this is not an inherent consequence of a fixed exchange rate itself. Ultimately, the inflexibility of a fixed exchange rate system can disrupt the natural equilibrium of trade flows, leading to the possibility of significant trade imbalances.