Under a system of managed-floating exchange rates with heavy exchange rate intervention:
A) Fiscal policy is successful in promoting internal balance,while monetary policy is unsuccessful
B) Monetary policy is successful in promoting internal balance,while fiscal policy is unsuccessful
C) Both fiscal policy and monetary policy are successful in promoting internal balance
D) Neither fiscal policy nor monetary policy are successful in promoting internal balance

Question

Quizplus · Accepted Answer

Under a system of managed-floating exchange rates with heavy exchange rate intervention, central banks intervene in the foreign exchange market to influence the exchange rate. This can limit the effectiveness of fiscal policy in promoting internal balance because changes in government spending or taxation may be offset by changes in the exchange rate. On the other hand, monetary policy can be effective in promoting internal balance because the central bank can adjust interest rates to influence the demand for domestic goods and services. Therefore, monetary policy is more successful in promoting internal balance than fiscal policy in this scenario.

Under a System of Managed-Floating Exchange Rates with Heavy Exchange