In fixed exchange rate system, the following is TRUE except

Question

BlackTom AI · Accepted Answer

Fixed exchange rate regimes constrain independent monetary policy through foreign-exchange interventions and the Mundell–Fleming “trilemma.”

1) Relevant concepts
- Fixed exchange rate: the central bank pegs its currency to another currency or basket and intervenes in FX markets to maintain the peg.
- Monetary policy independence: the ability of a central bank to set interest rates and money supply to meet domestic goals (inflation, growth).
- Mundell–Fleming trilemma: a country cannot simultaneously have (a) a fixed exchange rate, (b) free capital mobility, and (c) independent monetary policy — at most two.

2) Step-by-step reasoning
- To keep a peg, the central bank must buy/sell foreign reserves. If the domestic currency is under depreciation pressure, the central bank sells foreign currency and buys domestic currency (reducing domestic money supply). If under appreciation pressure, it buys foreign currency (increasing domestic money supply).
- These interventions tie domestic money supply and interest rates to exchange rate stability rather than to domestic policy goals.
- With open capital markets, capital flows transmit foreign interest rate changes to the domestic economy; to defend the peg the central bank must follow or offset those flows, limiting independent choices.

3) Intermediate logic (no numeric calculation required)
- Example: foreign interest rates rise. Capital outflows put downward pressure on the domestic currency. To maintain the peg, the central bank must raise domestic interest rates or sell reserves — both are responses driven by the peg, not solely by domestic objectives.

4) Why the correct answer is correct
- “Able to control monetary policy” is not true under a fixed exchange rate in the usual case with mobile capital: the peg forces the central bank’s hands, reducing monetary autonomy.

5) Why the other options are true (brief)
- “Ensure stability and avoid fluctuations of the domestic currency”: a peg explicitly stabilizes the exchange rate.
- “Maintenance of low inflation”: a credible peg can import low inflation from the anchor currency and constrain domestic monetary expansion.
- “Greater certainty for exporters and importers”: stable exchange rates reduce transaction and planning risk for trade and investment.

6) Conclusion
Therefore the false statement (the exception) is “Able to control monetary policy,” which matches the provided answer.

In fixed exchange rate system, the following is TRUE except单项选择题

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