When exchange rates are fixed but fiscal and monetary policies are not coordinated, equilibrium exchange rates can move away from their fixed levels.

Question

Quizplus · Accepted Answer

When fiscal and monetary policies are not coordinated, the actions taken by one country can cause imbalances with other countries, leading to changes in the demand and supply of currencies, which can cause equilibrium exchange rates to move away from their fixed levels.

When Exchange Rates Are Fixed but Fiscal and Monetary Policies