A question in economics - about monetary ploicy?

Question

When is monetary policy more effective in affecting output

- when the exchange rate floats or when the exchange rate is fixed?

In urgent need of an answer. Thanks.

Answer 1

In general, monetary policy refers to the open market operations performed by the Central bank on the bond market. By selling and buying bonds, the Central Bank is able to change the market interest rate.

Under a fixed exchange rate regime, the national interest rates de facto becomes fixed as well. Accordingly, the Central banks can no longer effect the rate of interest in the economy through open market operations. Thus, under a fixed exchange rate regime, the Central bank loses all of its monetary policy tools.

This can be proven using several graphs. Whether you need them for this question of course depends on the level of education you are following. For a high-school level answer, the above is fine. For university level, graphs must be drawn.