Fixed rates provide exchange rate stability

Steps:

• Identify the key difference: Floating rates fluctuate with market forces, creating uncertainty; fixed rates are pegged to a stable value.
• Consider government goals: Governments switch to fixed rates to eliminate volatility in currency values.
• Evaluate business impacts: Businesses prefer predictable exchange rates for planning imports, exports, and investments.
• Match to options: Certainty for businesses aligns with the stability benefit of fixed rates.

Why C is correct:

• Fixed exchange rates anchor the currency to a stable value, reducing volatility and providing predictability essential for business planning, as per international trade theory.

Why the others are wrong:

• A: Fixed rates often deplete reserves to defend the peg, not increase them.
• B: Terms of trade depend on export/import price ratios, unaffected directly by the exchange rate regime.
• D: Fixed rates stabilize but do not inherently reduce domestic prices, which depend on monetary policy.

Final answer: C