Which of the following statements is accurate?
A)Fiscal policy is not effective with fixed exchange rates in an environment of highly responsive international capital flows.
B)Fiscal policy is highly effective with fixed exchange rates and unresponsive international capital flows.
C)Fixed exchange rates greatly constrain a country's ability to pursue an independent monetary policy.
D)Contractionary monetary policy is effective under a fixed exchange rate regime.

Question

Quizplus · Accepted Answer

Fixed exchange rates limit a country's ability to adjust their own monetary policy as they must maintain a certain exchange rate peg. This makes it difficult to pursue an independent monetary policy as adjustments in interest rates may conflict with the fixed exchange rate.

Which of the Following Statements Is Accurate