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    Question

    Under a fixed exchange rate system (A)_________ would be

    an exogenous monetary policy instrument, whereas under a flexible exchange rate system (B) ______________ would be an endogenous monetary policy instrument.
    A A) the exchange rate; (B) the exchange rate Correct Answer Incorrect Answer
    B A) the exchange rate; (B) the interest rate Correct Answer Incorrect Answer
    C A) the interest rate; (B) the exchange rate Correct Answer Incorrect Answer
    D A) the interest rate; (B) the interest rate Correct Answer Incorrect Answer

    Solution

    Monetory policy is ineffective under the fixed exchange rate regime. Therefore, exchange rate is an exogenous monetary policy instrument under a fixed exchange rate system. A flexible exchange-rate system is a monetary system that allows the exchange rate to be determined by supply and demand. That why exchange rate is an endogenous policy instrument under a fixed exchange rate system.

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