Explain why under fixed exchange rate, monetary policy is ineffective whereas under floating exchange rate it is effective in rising
Answer: Under floating, by purchasing domestic assets the central bank causes an initial excess supply of domestic money that simultaneously pushed the domestic interest rate downward and weakens the currency. However, under fixed exchange rate the central bank will resist any tendency of the currency to depreciate by selling foreign assets for domestic money and so removing the initial excess supply of money its policy move has caused.
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