With a fixed exchange rate regime, monetary policy is:

Question

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With a fixed exchange rate regime, the central bank is committed to maintaining a fixed exchange rate. As a result, monetary policy is limited in its ability to shift aggregate demand to the right because any increase in the money supply would lead to an increase in demand for domestic goods and services, which would lead to an increase in imports, putting pressure on the exchange rate to depreciate. Therefore, the central bank must be cautious in its use of monetary policy to avoid putting pressure on the exchange rate.

With a Fixed Exchange Rate Regime, Monetary Policy Is