4 Views

Question : Assertion: A country with a fixed exchange rate regime has limited control over its monetary policy.

Reason: In a fixed exchange rate system, the central bank must intervene to maintain the exchange rate at the specified level, which restricts its ability to independently set interest rates.

Option 1: True, as the central bank needs to prioritize exchange rate stability over domestic monetary policy objectives.
 

Option 2: True, only if the country has a large foreign exchange reserve.
 

Option 3: False, as fixed exchange rate regimes provide more flexibility in implementing monetary policy.

 

Option 4: False, as countries with fixed exchange rates have complete control over their monetary policy.


Team Careers360 8th Jan, 2024
Answer (1)
Team Careers360 12th Jan, 2024

Correct Answer: True, as the central bank needs to prioritize exchange rate stability over domestic monetary policy objectives.


Solution : The correct answer is (a) True, as the central bank needs to prioritize exchange rate stability over domestic monetary policy objectives.

A country with a fixed exchange rate regime indeed has limited control over its monetary policy. In a fixed exchange rate system, the central bank intervenes in the foreign exchange market to maintain the exchange rate at the specified level. This intervention often requires the central bank to use its foreign exchange reserves and adjust interest rates to align with the target exchange rate. As a result, the central bank's ability to independently set interest rates and pursue domestic monetary policy objectives is constrained by the need to prioritize exchange rate stability. Therefore, countries with fixed exchange rates have less flexibility in implementing monetary policy compared to countries with floating exchange rates.

Related Questions

Chandigarh University Admissi...
Apply
Ranked #1 Among all Private Indian Universities in QS Asia Rankings 2025 | Scholarships worth 210 CR
Amity University Noida MBA Ad...
Apply
Amongst top 3% universities globally (QS Rankings)
Amity University Noida B.Tech...
Apply
Among Top 30 National Universities for Engineering (NIRF 2024) | 30+ Specializations | AI Powered Learning & State-of-the-Art Facilities
Jindal Global Law School Admi...
Apply
Ranked #1 Law School in India & South Asia by QS- World University Rankings | Merit cum means scholarships | Regular Admissions Deadline: 30th Apr'25
UPES B.Tech Admissions 2025
Apply
Ranked #42 among Engineering colleges in India by NIRF | Highest CTC 50 LPA , 100% Placements | Last Date to Apply: 28th April
Amity University, Noida Law A...
Apply
700+ Campus placements at top national and global law firms, corporates, and judiciaries
View All Application Forms

Download the Careers360 App on your Android phone

Regular exam updates, QnA, Predictors, College Applications & E-books now on your Mobile

150M+ Students
30,000+ Colleges
500+ Exams
1500+ E-books