Which one of the following statements is the MOST accurate?
A) Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply.
B) Under a flexible exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.
C) Under a fixed exchange rate, fiscal policy tools are powerless to affect the economy's money supply or its output.
D) Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.
E) Under a dirty float exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate, the central bank is committed to maintaining a specific exchange rate, which means they cannot use monetary tools (such as changing interest rates or printing money) to affect the money supply or output. This is because any change in the money supply will lead to a change in the exchange rate, which the central bank is not willing to allow. Fiscal policy tools (such as government spending or taxation) can still be used to affect the economy under a fixed exchange rate. Flexible exchange rates allow the central bank more freedom to use monetary tools to affect the economy. Dirty float exchange rates, also known as managed float, allow the central bank to intervene in the currency market to influence the exchange rate, but they still have some effect on the money supply and output through their actions.

Which One of the Following Statements Is the MOST Accurate