Suppose a country switches from a fixed to a flexible exchange rate.Which of the following will occur as a result of this change?
A)Monetary policy will become a less effective tool for changing output.
B)A given change in government spending will now have a greater effect on output.
C)Both fiscal and monetary policy will become more effective in changing GDP.
D)Both fiscal and monetary policy will become completely ineffective in changing GDP.
E) none of the above

Question

Quizplus · Accepted Answer

Under a flexible exchange rate system, monetary policy becomes more effective because the central bank has more control over domestic interest rates without the need to maintain exchange rate parity. Fiscal policy effectiveness can vary depending on the mobility of capital and other factors, but it does not necessarily become more effective or ineffective solely due to the exchange rate regime. Therefore, none of the provided options accurately describe the effects of switching to a flexible exchange rate system.

Suppose a Country Switches from a Fixed to a Flexible