Monetary policy is most effective when the exchange rate is:
A) fixed.
B) floating.
C) on a managed float.
D) pegged to another country's currency.

Question

Quizplus · Accepted Answer

Monetary policy is most effective when the exchange rate is floating because in this case, the central bank can use interest rate adjustments and other monetary policy tools to influence the exchange rate. When the exchange rate is fixed, pegged or managed, the central bank's ability to adjust interest rates and other policy tools is limited, and its influence on the exchange rate is reduced.

Monetary Policy Is Most Effective When the Exchange Rate Is