A government can target its exchange rate only if it:

Question

Quizplus · Accepted Answer

If a government targets its exchange rate, it must use monetary policy to intervene in the foreign exchange market. This means that the government must buy or sell its currency to influence its value relative to other currencies. However, if the government wants to use monetary policy to stabilize its economy (e.g. by adjusting interest rates), it may conflict with its exchange rate target. Therefore, the government must choose between targeting the exchange rate or using monetary policy to stabilize the economy. By choosing to target the exchange rate, the government is giving up the ability to use monetary policy for other purposes.

A Government Can Target Its Exchange Rate Only If It