When exchange rates are volatile:

A. international economic activity is increased.

B. firms engage in more trade.

C. firms are assured that they will be able to earn profits from currency swings.

D. trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll.

The correct answer is letter "D": trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll.

Explanation:

Currency exchange rates are the value given to different foreign currencies. They have a direct impact on international trade because moreover when a company handles operations worldwide because their increase or decrease in value generates uncertainty in the market. Firms are unable to predict if they can make a profit in front of constant fluctuations in the exchange rates.

Therefore, corporations prefer to make businesses in countries where there is economic and politic stability which usually results in having a stable currency exchange rate.

D - trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll.

Explanation:

When exchange rates are volatile, instability and uncertainty can be created in economy, affecting international trade and flow of capital.

Stable currencies, coupled with dynamic economy and a strong government, attract more foreign capital from investors as there is a level of trust in the profits and losses calculated to be made from investments.

A lack of certainty, pertaining to currency fluctuations, could discourage foreign investors from investing as potential loss that could be made.