Monetary policy is very effective under a fixed exchange rate policy.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate policy, the central bank would have to intervene in the foreign exchange market to maintain the fixed exchange rate. This limits the effectiveness of monetary policy as the central bank would have to consider the impact of its actions on the exchange rate. Therefore, monetary policy would not be as effective under a fixed exchange rate policy.

Monetary Policy Is Very Effective Under a Fixed Exchange Rate