Why is it that in a pure, flexible exchange rate system,the foreign exchange market has no direct effect onthe money supply? Does this mean that the foreignexchange market has no effect on monetary policy?

Why is it that in a pure, flexible exchange rate system,the foreign exchange market has no direct effect onthe money supply? Does this mean that the foreignexchange market has no effect on monetary policy?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 25CTQ: If a countrys currency is expected to appreciate in value, what would you think will be the impact...

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Question

Why is it that in a pure, flexible exchange rate system,
the foreign exchange market has no direct effect on
the money supply? Does this mean that the foreign
exchange market has no effect on monetary policy?

Definition Definition Policy implemented by the central bank of a country (such as the Federal Reserve in the United States) to achieve certain macroeconomic objectives. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.

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