ii) If the exchange rate of dollar stays fixed, how would this change affect us domestic...

ii) If the exchange rate of dollar stays fixed, how would this change affect us domestic product and income? What effect would this change in Fiscal Policy have on dollar?

Expert Solution

A fixed exchange rate provides currency stability. The non-volatile currency exchange attract foreign investments. If exchange rate of dollor is fixed, it will strenghthen economy of the country. In floating exchange rate scenario, country manages it economy keeping a balance between Fiscal and Monitory policies. However, Fiscal policy becomes super effective than Monitory policy if coutry choses to fixed exchange rate. In fixed exchange rate, trade balance, unemployment and interest rate shall all remain same. If the country has a heavy international trade which is contributing to its GDP, fixed exchange rate will affect its fluctuation. Keeping fixed dollar rate will restrict its opportunities to import and export. In today's competitive world, foreign trades and investments are contributing to country's income. Fixed exchange rate will restrict foreign opportunities and income of the country will be less as compared to under floating rate.

jeff jeffy answered 6 months ago

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