Question

In: Economics

Discuss the effectiveness of the monetary policy in the fixed exchange rate system?

Discuss the effectiveness of the monetary policy in the fixed exchange rate system?

Solutions

Expert Solution

1. Monetary Policy:- It is the policy assumed by the monetary authority of a country that directs either the interest rate payable on very short-term financing or the money supply, often targeting inflation or the interest rate to secure price firmness and general trust in the currency.

2. Fixed Exchange Rate System:- A fixed exchange rate is a rule applied by a government or central bank bind the country’s currency official exchange rate to another country’s currency or the price of gold. The main aim of a fixed exchange rate system is to keep a currency’s value within a limited band.

3. The effectiveness of the monetary policy in the fixed exhcange rate system:-

A monetary policy has no effect on GNP or the exchange rate in a fixed exchange system. As such, the trade balance, unemployment and interest rate affected by monetary policy. The AA-DD model to assess the effects of monetary policy in a fixed exchange rate system.

Diagram


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