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 development of its financial markets.
B)the degree of capital controls.
C)the amount of foreign exchange it holds.
D)all of the above
E) both A and B

Question

Quizplus · Accepted Answer

The ability of a country to move its domestic interest rate while maintaining its exchange rate under a fixed exchange rate regime with imperfect capital mobility depends on various factors including the development of its financial markets, the degree of capital controls, and the amount of foreign exchange reserves it holds. These factors influence the country's ability to intervene in the foreign exchange market and manage capital flows, which are crucial for maintaining a fixed exchange rate while adjusting domestic interest rates.

Suppose a Country Is Pursuing a Fixed Exchange Rate Regime