Under a clean float, policy mixes can cause the exchange rate to change and harm one or more sectors of the domestic economy.

Question

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Under a clean float, also known as a pure float, exchange rates are determined by the market forces of supply and demand without direct government intervention. Policy mixes, such as fiscal or monetary policies, can influence these market forces, leading to changes in the exchange rate. These changes can benefit some sectors of the economy by making exports cheaper and imports more expensive (or vice versa), but they can also harm other sectors by making their goods less competitive abroad or increasing their costs of imported inputs.

Under a Clean Float, Policy Mixes Can Cause the Exchange