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.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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