Assuming the free flow of capital, explain why the central bank of a country that has fixed its exchange rate would not find discussions of inflation on the agenda of its policy meetings.

What will be an ideal response?


As we saw in the chapter, a central bank must choose between a fixed exchange rate and an independent inflation policy; it cannot have both. So once a country or its central bank decides on a fixed exchange rate, then monetary policy has to be conducted so that its inflation rate matches the inflation rate of the country their currency is fixed with.

Economics

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