Under a flexible exchange rate regime,governments can retain monetary policy independence because the external balance will be achieved by

Question

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Under a flexible exchange rate regime, governments can adjust the exchange rate according to its monetary policy objective. If the government wants to stimulate the economy and increase inflation, it can lower the interest rate, and this will lead to a decrease in the value of the currency. This will make imports more expensive and exports cheaper, leading to an improvement in the external balance. Similarly, if the government wants to reduce inflation, it can increase the interest rate, leading to an appreciation of the currency, making exports more expensive and imports cheaper. Therefore, by adjusting the exchange rate, the government can achieve an external balance without compromising its monetary policy independence.

Under a Flexible Exchange Rate Regime,governments Can Retain Monetary Policy