Question

1)

A)

Discuss the ineffectiveness of monetary policy while trying to correct a sluggish economy under a fixed exchange rate.

B)

if policy makers are particularly concerned about the current account deficit (i.e. trade deficit),

c) discuss whether stimulatory fiscal policy or monetary policy would make more sense while correcting recessionary gaps

please actually answer the question in the following format:

A) answer

B) answer

C) answer

previous answers to this question have been incorrect or incomplete.

Answer 1

(A) Monetary policy can be ineffective in influencing the economy under fixed exchange rate system,either we use expansionary or contractionary monetary policy. If an economy's growth is sluggish, then central bank has not ability to improve it by increasing money supply. It can't change interest rate, current account balance and GNP of the economy. Because increase in money supply reduces country A's interest rate and rate of returns on assets of the same country A. Now investor will demand more assets or currency of country B. Under fixed exchange rate system, Country A central bank will relieve demand of country B currency. Hence, sale of foreign currency by country A's central bank will lead to reduction in money supply of country A because Country A central bank has bought its own currency. overall, there will be no change in the interest rate.

(B) Question is not clear. Only statement is mentioned.

(C) Fiscal policy make use of tax and expenditure while monetary policy is made by central bank by managing money supply and interest rate. Under recession, expansionary monetary policy can be used as well the expansionary fiscal policy. Expansionary fiscal policy in terms of cut in taxation and increase in government spending is most suitable to implement under recession. During recession, investors turn pessimistic can be induced by autonomous investment by the government. Also, tax holiday encourage the industries and production.