A fixed exchange rate, plus perfect capital mobility ________ the scope for monetary policy ?
Correct answer: B. undermines
- A. enhances
- B. undermines
- C. encourages
- D. facilitates
Explanation
With perfect capital mobility, attempts to use monetary policy alter interest rates and trigger large capital flows that put pressure on the fixed exchange rate. Maintaining the peg therefore undermines independent monetary policy.
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About Macroeconomics
The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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