A) In a floating exchange rate system, monetary policy becomes extremely effecti

Question

A) In a floating exchange rate system, monetary policy becomes extremely effective, whereas fiscal policy becomes ineffective. Explain why, using words and drawing diagrams. Be sure to label: (i) the axes; (ii) the curves; (iii) the initial equilibrium values; (iv) the direction the curves shift; and (v) the new long-run equilibrium values.

B) In a fixed exchange rate system, fiscal policy becomes extremely effective, whereas monetary policy becomes ineffective. Explain why, using words and drawing diagrams. Be sure to label: (i) the axes; (ii) the curves; (iii) the initial equilibrium values; (iv) the direction the curves shift; and (v) the new long-run

Explanation / Answer

Floating exchange rates

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