Which one of the following statements is the most accurate?
A) Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply.
B) Under a flexible exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.
C) Under a fixed exchange rate, fiscal policy tools are powerless to affect the economy's money supply or its output.
D) Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.
E) Under a dirty float exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate, the central bank must intervene in the foreign exchange market to maintain the fixed rate. This limits the ability of the central bank to use monetary tools to affect the money supply and output of the economy. Therefore, option D is the most accurate statement. The other options either overstate or understate the limitations of monetary and fiscal policy tools under different exchange rate regimes.

Which One of the Following Statements Is the Most Accurate