48.1k views
3 votes
Under a flexible exchange rate system, which of the following variables do monetary policy affect?

1) Interest rates
2) Exchange rates
3) Inflation rates
4) All of the above

User Ugur
by
8.3k points

1 Answer

2 votes

Final answer:

Monetary policy affects interest rates, exchange rates, and inflation rates under a flexible exchange rate system.

Step-by-step explanation:

Under a flexible exchange rate system, monetary policy affects all of the above: interest rates, exchange rates, and inflation rates.

Monetary policy refers to the actions taken by a country's central bank to influence the supply of money and credit in the economy. In a flexible exchange rate system, where the value of a country's currency is determined by market forces, changes in monetary policy can have an impact on various variables.

For example:

  • Interest rates: By adjusting the interest rates, the central bank can influence borrowing costs, which in turn affects consumer spending, investment, and economic growth.
  • Exchange rates: Changes in monetary policy can lead to changes in interest rates, which can affect the demand for a country's currency in the foreign exchange market. This, in turn, can impact the exchange rate.
  • Inflation rates: Monetary policy plays a crucial role in controlling inflation. By adjusting interest rates and managing the money supply, the central bank can influence the level of inflation in the economy.
User Jspooner
by
8.4k points

No related questions found