In an open economy with global capital markets and mobile capital:

Question

Quizplus · Accepted Answer

In an open economy with global capital markets and mobile capital, a country cannot have full control over both its domestic money supply and exchange rate. If a country wants to have control over its exchange rate, it can intervene in the foreign exchange market by buying or selling its currency to influence its value. However, this would require a flexible money supply as well, which would be influenced by market forces such as inflation and interest rates. Conversely, if a country wants to have control over its domestic money supply, it would need to have a flexible exchange rate that adjusts in response to market forces. In either case, the country cannot fully control both variables simultaneously.

In an Open Economy with Global Capital Markets and Mobile