If a country fixes its exchange rate, it loses its ability to use monetary policy for macroeconomic stabilization.

Question

Quizplus · Accepted Answer

When a country fixes its exchange rate, it is committing to maintaining that exchange rate level. This means that it cannot use monetary policy (such as adjusting interest rates) to affect the exchange rate. Since exchange rates are a key component of macroeconomic stability, this limits the effectiveness of monetary policy for stabilization purposes.

If a Country Fixes Its Exchange Rate, It Loses Its