Under fixed exchange rates, what is the effect of domestic asset transactions conducted by the central bank?
Understand the Problem
The question is asking about the effects of domestic asset transactions by a central bank under a fixed exchange rate regime. It's crucial to understand how these transactions impact foreign reserves, employment, output, and the money supply within the constraints of a fixed exchange rate.
Answer
Domestic asset transactions by the central bank can alter the domestic money supply and foreign reserves, but monetary policy tools are powerless.
Under fixed exchange rates, domestic asset transactions conducted by the central bank can alter the domestic money supply and the level of foreign reserves. However, the central bank's monetary policy tools are powerless to affect the economy's money supply.
Answer for screen readers
Under fixed exchange rates, domestic asset transactions conducted by the central bank can alter the domestic money supply and the level of foreign reserves. However, the central bank's monetary policy tools are powerless to affect the economy's money supply.
More Information
Fixed exchange rates can help maintain low inflation, which keeps interest rates down and stimulates trade and investment.
Tips
A common mistake is assuming that central banks retain full monetary control under fixed exchange rates. In reality, they must prioritize maintaining the fixed rate, which limits their ability to influence the money supply independently.
Sources
- Solved Under fixed exchange rates, domestic asset | Chegg.com - chegg.com
- [PDF] Chapter 17 - eml.berkeley.edu
AI-generated content may contain errors. Please verify critical information
