Explanation:

- Option 1: None

- This suggests there are no demerits to a flexible exchange rate, which is inaccurate. There are drawbacks, such as potential volatility.

- Option 2: Creates instability

- This is correct. Flexible exchange rates can lead to exchange rate volatility. This can create uncertainty for international businesses and investors. It can destabilize economies by making export and import prices unpredictable.

- Option 3: Has no effect on stability

- Suggests neither positive nor negative impact on stability. This is not true because flexible exchange rates can impact economic stability.

- Option 4: Creates stability

- Contrary to flexible exchange rates, which can be volatile and may cause economic instability. Stability is more likely associated with fixed exchange rate systems.