The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Fixed exchange rates serve as a constraint on inflationary government policies.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Fixed exchange rates serve as a constraint on inflationary government policies.

Quizplus · Accepted Answer

Fixed exchange rates limit the ability of a government to pursue inflationary policies because any increase in the money supply or government spending would lead to an immediate outflow of foreign exchange reserves and a decrease in the value of the domestic currency relative to the fixed exchange rate. This constraint can lead to greater macroeconomic stability and discipline on government actions.

The Figure Given Below Depicts the Foreign Exchange Market for British