It is impossible to conduct _______ policy and maintain a _______ exchange rate.
A) monetary; fixed
B) monetary; floating
C) fiscal; fixed
D) fiscal; floating

Question

Quizplus · Accepted Answer

Monetary policy refers to the actions taken by a central bank to manage the supply and demand of money and credit to achieve specific macroeconomic objectives. A fixed exchange rate regime is one where the value of a currency is pegged to the value of another currency, or a basket of currencies, or gold. In a fixed exchange rate regime, the central bank has to intervene in the foreign exchange market to maintain the exchange rate at the predetermined level, by buying and selling foreign currencies. However, if the central bank conducts monetary policy to influence the domestic economy, it may cause a mismatch between the domestic and foreign interest rates, which would lead to a capital flow and a pressure on the exchange rate. Thus, it is impossible to conduct monetary policy and maintain a fixed exchange rate at the same time.

It Is Impossible to Conduct _______ Policy and Maintain a _______

It Is Impossible to Conduct _ Policy and Maintain a _