Some countries have fixed exchange rate systems instead of flexible exchange rate systems. Which of the following is a reason why fixed exchange rate systems have limited abilities to use monetary policy? A. Under a fixed exchange rate system, if a central bank conducts a monetary policy, there is no change in domestic interest rates because people only respond to exchange rate changes. B. Under a fixed exchange rate system, if a central bank conducts a monetary policy, then it puts pressure on the exchange rate and the central bank would have to offset that effect. C. Under a fixed exchange rate system, central banks do not exist so monetary policy cannot be conducted. D. All of the above.

Question

Miguel Daugherty

Business

14 February, 10:56

Some countries have fixed exchange rate systems instead of flexible exchange rate systems. Which of the following is a reason why fixed exchange rate systems have limited abilities to use monetary policy? A. Under a fixed exchange rate system, if a central bank conducts a monetary policy, there is no change in domestic interest rates because people only respond to exchange rate changes. B. Under a fixed exchange rate system, if a central bank conducts a monetary policy, then it puts pressure on the exchange rate and the central bank would have to offset that effect. C. Under a fixed exchange rate system, central banks do not exist so monetary policy cannot be conducted. D. All of the above.

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Answers (1)

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Jaylin Conner · Answer 1

Option B - Under a fixed exchange rate system, if a central bank conducts a monetary policy, then it puts pressure on the exchange rate and the central bank would have to offset that effect.

Explanation:

Central banks are required to initiate measures to keep the exchange rate fixed, such that any move by them which causes movement of exchange rate will have to be countered by themselves.

Hence, if a central bank administers a monetary policy under a fixed exchange rate system, it would exert pressure on the exchange rate and the central bank would have to counteract that effect.

Therefore, option B is the correct answer choice.