Fiscal policy is most effective when exchange rates are fixed.

Question

Quizplus · Accepted Answer

Fiscal policy is more effective when exchange rates are fixed because changes in monetary policy, such as interest rates, do not have as big of an impact on the economy. When exchange rates are floating, changes in fiscal policy can lead to changes in the exchange rate, which can offset some of the intended effects of the policy. However, when exchange rates are fixed, fiscal policy can have a more direct impact on the economy without being influenced by changes in the exchange rate.

Fiscal Policy Is Most Effective When Exchange Rates Are Fixed