Monetary policy is more effective when:
A) the exchange rate is fixed.
B) the exchange rate is floating.
C) it is contractionary.
D) it is expansionary.

Question

Quizplus · Accepted Answer

When the exchange rate is floating, the central bank is free to use monetary policy to affect domestic interest rates and inflation. In contrast, a fixed exchange rate limits the ability of the central bank to use monetary policy to achieve its objectives. Additionally, both expansionary and contractionary monetary policy can be effective, depending on the economic conditions and the specific goals of the central bank.

Monetary Policy Is More Effective When