Suppose a country switches from a flexible to a fixed exchange rate. Which of the following...
Suppose a country switches from a flexible to a fixed exchange rate. Which of the following will occur as a result of this change?
A) Monetary policy will become a more effective tool for changing output.
B) Fiscal policy will become a less effective tool for changing output.
C) Both fiscal and monetary policy will become more effective in changing GDP.
D) Both fiscal and monetary policy will become completely ineffective in changing GDP.
E) none of the above
Please provide an explanation for the answer. Thanks in advance.
Homework Answers
Answer : (e)
Under the flexible exchange rate system , monetary policy is effective in raising the level of output. But in case of fixed exchange rate system, fiscal policy is effective in increasing the output level.
Thus all answers given here are incorrect.
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