Some economists suggest that one benefit of adopting a fixed-exchange-rate regime is that it forces the central bank to:prevent excessive increases in the money supply.use money supply changes as the main policy tool to keep the economy at full employment.keep inflation rates to zero percent.allow the money supply to grow unchecked.
Question
Some economists suggest that one benefit of adopting a fixed-exchange-rate regime is that it forces the central bank to:prevent excessive increases in the money supply.use money supply changes as the main policy tool to keep the economy at full employment.keep inflation rates to zero percent.allow the money supply to grow unchecked.
Solution
The benefit of adopting a fixed-exchange-rate regime, as suggested by some economists, is that it forces the central bank to prevent excessive increases in the money supply.
Here's a step-by-step explanation:
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A fixed exchange rate regime is a system where the value of a currency is set or pegged to the value of another currency or to a valuable commodity like gold.
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In such a system, the central bank has to maintain the fixed exchange rate by buying or selling its own currency on the foreign exchange market in return for the currency to which it is pegged.
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If the central bank allows the money supply to increase excessively, it could lead to inflation, which would increase the price of domestic goods and make them less competitive on the international market.
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This would increase demand for foreign currency (to buy cheaper foreign goods), and decrease demand for the domestic currency.
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To maintain the fixed exchange rate, the central bank would then have to sell its foreign reserves and buy back its own currency, which could deplete its foreign reserves.
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Therefore, to avoid this, the central bank is forced to prevent excessive increases in the money supply when operating under a fixed-exchange-rate regime.
Similar Questions
A fixed exchange rate work better for countries that already have a stable and effective monetary policy.
A fixed exchange rate regime(a) forces a country to give up free international flows of capital.(b) forces a country to abandon independent monetary policy(c) can eliminate exchange rate uncertainty(d) is the model used by the U.S. Federal Reserve.
The purpose of a fixed exchange rate system is to keep a currency's value within a narrow band.
The central bank of a small open economy with perfect capital mobility and a fixed exchange rate can increase equilibrium income by:devaluing the currency.shifting the LM* curve to the left.allowing the currency to float while retaining a fixed exchange rate.revaluing of the currency.
Multiple Choice QuestionWhat is the main problem that arises from the policies countries use to maintain a fixed exchange rate?Multiple choice question.They reduce the volume of world trade.They restrict the amount of currency that can be exchanged.They require the involvement of central banks.They limit how much gold is available for reserves.
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