In the monetary small open-economy model with a fixed exchange rate,the domestic
A) government loses control over the level of domestic government spending.
B) government loses control over the level of domestic taxes.
C) government loses control over the level of domestic government spending and domestic taxes.
D) central bank loses control over the domestic stock of money.

Question

Quizplus · Accepted Answer

In a fixed exchange rate system, the central bank must intervene in the foreign exchange market to maintain the exchange rate, which affects the domestic money supply. Thus, the central bank loses control over the domestic stock of money.

In the Monetary Small Open-Economy Model with a Fixed Exchange