Monetary policy is most effective in influencing aggregate demand:
A)under a freely floating exchange-rate system.
B)under a fixed exchange-rate system with sterilization.
C)under a fixed exchange-rate system without sterilization.
D)when there is low capital mobility.

Question

Quizplus · Accepted Answer

Under a freely floating exchange-rate system, a country's central bank can adjust interest rates and the money supply to influence aggregate demand without any restrictions caused by maintaining a fixed exchange rate. This means that the central bank can use monetary policy more flexibly to stimulate or cool off the economy as needed.

Monetary Policy Is Most Effective in Influencing Aggregate Demand