It is often said by economists that fixed exchange rates make monetary policy totally ineffective as a stabilization tool. Explain why you agree or disagree with this statement. Assume an open economy. Keynes favoured fiscal policy over monetary policy to stabilize the economy and fixed exchange rates over flexible exchange rates. Is it consistent or inconsistent to pair fiscal policy with fixed exchange rates and monetary policy with flexible exchange rates? Explain why.

It is often said by economists that fixed exchange rates make monetary policy totally ineffective as a stabilization tool. Explain why you agree or disagree with this statement. Assume an open economy. Keynes favoured fiscal policy over monetary policy to stabilize the economy and fixed exchange rates over flexible exchange rates. Is it consistent or inconsistent to pair fiscal policy with fixed exchange rates and monetary policy with flexible exchange rates? Explain why.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter4: The Aggregate Economy

Section: Chapter Questions

Problem 5E

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6. In a small open economy undertaking a fiscal contraction, the real interest rate should: rise fall stay the same move by the same amount as the exchange rate
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1. Given the discussion of the effects of fiscal policy in this chapter, if the central bank does not change the policy rate, a foreign fiscal expansion is likely to __________. A. increase foreign output and not change the foreign exchange rate. B. increase foreign output and decrease the foreign exchange rate. C. decrease foreign output and not change the foreign exchange rate. D. decrease both foreign output and the foreign exchange rate. 2.) Given the discussion of the effects of monetary policy in this chapter, a foreign monetary expansion is likely to __________. A. decrease foreign output and increase the foreign interest rate. B. increase foreign output and decrease the foreign interest rate. C. decrease both foreign output and the foreign interest rate. D. increase both foreign output and the foreign interest rate. 3.) Given the discussion of the effects of fiscal policy in this chapter, how does a foreign fiscal…
Explain the contractionary fiscal policy in the short run and long run (ignoring exchange rate and capital flows).
Explain the expansionary fiscal policy in the short run and long run (ignoring exchange rate and capital flows).
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