Flexible exchange rates ________ of monetary policy to stabilize the economy and fixed exchange rates ________ of monetary policy to stabilize the economy.

Question

Quizplus · Accepted Answer

Flexible exchange rates mean domestic monetary policy is reinforced in foreign transactions. For example, if easy monetary policy lowers domestic interest rates, this stimulates GDP growth. Additionally, lower interest rates discourage foreign capital investment, which weakens the dollar and encourages exports. However, with fixed exchange rates, monetary policy cannot be used for all purposes at the same time. If monetary policy is used to maintain fixed foreign exchange rates, it cannot simultaneously be used to influence the domestic economy.

Flexible Exchange Rates ________ of Monetary Policy to Stabilize the Economy