If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country:

Question

Quizplus · Accepted Answer

If a country has a fixed exchange rate, it is committed to maintaining the exchange rate at a certain level, which means it cannot have a domestic monetary policy. This is because any changes in the domestic interest rate or the money supply will affect the exchange rate, and the central bank will need to intervene to maintain the fixed exchange rate. Therefore, the correct answer is (C) "Cannot have a domestic monetary policy".

None of the other options follow directly from the premise given. For example, a fixed exchange rate does not necessarily imply a high level of exports or gold reserves, nor must the country be running large trade deficits (although these outcomes are possible).

If Capital Flows Freely Between Countries and a Country Has