Monetary policy can be autonomous if _____.[Hint: see page 20 of lecture 4B]Group of answer choicesinterest rates in foreign countries are lowerinterest rates in foreign countries are higherthe exchange rate floats and capital is mobilethe exchange rate is fixed and capital is mobile
Question
Monetary policy can be autonomous if _____.[Hint: see page 20 of lecture 4B]Group of answer choicesinterest rates in foreign countries are lowerinterest rates in foreign countries are higherthe exchange rate floats and capital is mobilethe exchange rate is fixed and capital is mobile
Solution
The answer is "the exchange rate floats and capital is mobile".
Here's the step-by-step reasoning:
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Monetary policy autonomy refers to the ability of a country's central bank to set its own monetary policy (like interest rates or money supply) independently of foreign monetary policies or exchange rate considerations.
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If the exchange rate is fixed, the central bank has to adjust its monetary policy to maintain the fixed exchange rate. This means that it cannot set its monetary policy independently, so it does not have monetary policy autonomy.
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If capital is not mobile, the central bank can control the flow of capital in and out of the country, which can affect the exchange rate and limit the central bank's ability to set its monetary policy independently.
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Therefore, monetary policy can be autonomous if the exchange rate floats (which means that it is determined by market forces rather than by the central bank) and capital is mobile (which means that capital can move freely in and out of the country). This allows the central bank to set its monetary policy based on domestic economic conditions without having to worry about maintaining a fixed exchange rate or controlling capital flows.
Similar Questions
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