Problem
1. Why does the presence of different country preferences on possible inflation-unemployment trade-offs pose a problem for a system of fixed exchange rates?
2. What case can be made that flexible exchange rates reduce the flow of long-term foreign direct investment? What case can be made that flexible rates might actually lead to more foreign direct investment?
3. In what way might the relative susceptibility of a country to external shocks rather than internal shocks condition the choice between a fixed or flexible exchange rate for that country? Explain.