Suppose a country is pursuing a fixed exchange rate regime with imperfect capital mobility. The ability of that country to move its domestic interest rate while maintaining its exchange rate will depend on:
A) the degree of capital controls.
B) the degree of development of its financial markets.
C) the amount of foreign exchange it holds.
D) All of the above.
E) Both B and C.

Question

Quizplus · Accepted Answer

The ability of a country to move its domestic interest rate while maintaining its exchange rate in a fixed exchange rate regime with imperfect capital mobility will depend on all of the above factors - the degree of capital controls, the degree of development of its financial markets, and the amount of foreign exchange it holds. These factors affect the country's ability to adjust its interest rate without causing significant capital flows that could disrupt the exchange rate. Therefore, D is the correct choice.

Suppose a Country Is Pursuing a Fixed Exchange Rate Regime