Under flexible exchange rates, an open economy _____ monetary policy and _____ fiscal policy.

Question

Quizplus · Accepted Answer

Under flexible exchange rates, the country's currency value is determined by the market, and the central bank cannot control the exchange rate. Therefore, monetary policy becomes more effective in influencing the economy by adjusting interest rates to affect the supply of money. Thus, flexible exchange rates reinforce monetary policy. On the other hand, fiscal policy, which involves government spending and taxation, can affect demand and output in the economy, but it may also affect the balance of payments, leading to changes in the exchange rate. Therefore, flexible exchange rates can hamper fiscal policy.

Under Flexible Exchange Rates, an Open Economy _____ Monetary Policy