If a country chooses to establish fixed exchange rates and an independent monetary policy,it gives up the ability to have ________.

Question

Quizplus · Accepted Answer

When a country chooses to establish fixed exchange rates and an independent monetary policy, it gives up the ability to have free capital mobility. This means that the country cannot control the flow of its currency across borders, making it challenging to maintain the fixed exchange rate. A fixed exchange rate mechanism requires constant monitoring and intervention to keep the exchange rate at the target level. With free capital mobility, investors can easily move their money in and out of the country, which can lead to fluctuations in the exchange rate. Therefore, fixed exchange rates require some form of capital controls to limit the movement of capital in and out of the country, which reduces the capital mobility.

If a Country Chooses to Establish Fixed Exchange Rates and an Independent