A country with a fixed exchange rate regime:

Question

Quizplus · Accepted Answer

A fixed exchange rate regime reduces a country's bias towards inflationary policies by limiting its ability to devalue its currency to stimulate exports. This encourages the government to pursue more conservative policies to prevent inflation. It does not affect the uncertainty regarding the value of the currency (A), and it limits the use of monetary policy since interest rates must be adjusted to maintain the exchange rate (B). It also does not necessarily reduce the amount of foreign currency a country must hold (D).

A Country with a Fixed Exchange Rate Regime