Floating exchange rates lead to exchange rate volatility

Steps:

• Recall that floating exchange rates are determined by market supply and demand, without central bank intervention.
• Identify disadvantages: volatility can affect trade predictability, while advantages include policy flexibility.
• Evaluate options: A relates to fixed rates; B matches volatility issue; C and D describe fixed rate requirements.
• Confirm B as the core disadvantage for international trade.

Why B is correct:

• In floating systems, exchange rates fluctuate freely per market forces (supply/demand law), making prices of traded goods unpredictable and increasing business risk.

Why the others are wrong:

• A: Floating rates allow prioritizing domestic policies, as the exchange rate adjusts automatically to external shocks.
• C: Significant reserves are needed for fixed rates to defend the peg, not floating.
• D: Floating rates require minimal government intervention, unlike managed or fixed systems.

Final answer: B