A fixed exchange rate ____________ policymakers from using monetary policy to stabilize the economy,because they must instead use it to maintain the exchange rate's fundamental value at its _____________.

Question

Quizplus · Accepted Answer

A fixed exchange rate regime requires the central bank to intervene in the foreign exchange market to maintain the official value of the currency. Therefore, the central bank cannot use monetary policy to stabilize the domestic economy as it must prioritize maintaining the fixed exchange rate. This is why a fixed exchange rate regime prevents policymakers from using monetary policy to stabilize the economy.

A Fixed Exchange Rate ____________ Policymakers from Using Monetary Policy