Under fixed exchange rates, when is monetary policy consistent with both internal and external balance?
A) When the economy has unemployment and a current account deficit
B) When the economy has unemployment and a current account surplus
C) When the economy has inflation and a current account surplus
D) When the economy has both inflation and high unemployment
E) When the economy has both low inflation and negative real GDP growth.

Question

Quizplus · Accepted Answer

Under fixed exchange rates, monetary policy aimed at achieving internal balance (e.g., reducing unemployment) while also maintaining external balance (e.g., a current account surplus indicating that a country is not over-consuming its foreign reserves) is consistent when the economy has unemployment and a current account surplus. This scenario allows for policy measures that can stimulate economic activity without risking a depletion of foreign reserves or causing an unsustainable external debt position.

Under Fixed Exchange Rates, When Is Monetary Policy Consistent with Both