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

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

Rahul Sunny answered 9 months ago

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