Question
An economy with fixed exchange rate cannot maintain an independent monetary policy. Doyou agree with the above statement? Substantiate your answer with appropriate diagrams.
Answer :
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The debate of making a choice between fixed and floating exchange rate regimes is set forth by the Mundell–Fleming model, which argues that an economy (or the government) cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It must choose any two for control and leave the other to market forces.
The primary argument for a floating exchange rate is that it allows monetary policies to be useful for other purposes. Under fixed rates, monetary policy
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