Finance, Forex and Investments

fixed exchange rates if the central bank uses monetary policy to fix the exchange rate?

Which are true? A. All these choices are true. B. A fixed exchange rate magnifies the ability of monetary policy to stabilize the domestic economy. C. With a fixed exchange rate, net exports always tend to equal zero. D. Because the central bank is responsible for maintaining the fixed exchange rate, it is not free to use monetary policy to stabilize the domestic economy.

Public Comments

1. "D" is right answer.
2. C is definetly wrong because look at China, not quite fixed exchange rate, but pegged to the U.S. Dollar, and it's net exports are way high. Therefore A is wrong. Leaving B or D. So the question is, if you place a fixed exchange rate, does this facilitate monetary policy in stabilizing the economy? or not at all? I'm not 100% certain, but if I were a betting man I'd say B. Fixing exchange rates has traditionally been a way of stabilizing economies. EDIT: Sorry, I forgot the context of the question: that the central bank is using monetary policy to fix the exchange rate. Then NO, it would not be free to use monetary policy to stabilize the economy. If the central bank simply declared by decree the fixed exchange rate, then it would be free to do so, but in this context it's not, so the Answer is D!!!