Under a floating exchange rate regime:
A)only fiscal policy must be used to reconcile the goals of internal and external balance.
B)the changes in the exchange rate will take care of external balance leaving macroeconomic policy to take care of internal balance.
C)deficits and surpluses in the official settlements balance will be the primary concern of policy makers.
D)monetary policy must be used to manage the exchange rate.

Question

Quizplus · Accepted Answer

Under a floating exchange rate regime, changes in the exchange rate will adjust to maintain external balance, meaning that macroeconomic policy can focus on internal balance. This does not necessarily mean that fiscal policy is the only tool used to achieve internal balance, as monetary policy can also be used. Deficits and surpluses in the official settlements balance may still be a concern, but they are not the primary concern in policy making under a floating exchange rate regime.

Under a Floating Exchange Rate Regime