“Under floating rates, the economy is more vulnerable

“Under floating rates, the economy is more vulnerable to shocks coming from the domestic money market.”

Answer: The statement is true.  Under floating rates, a rise in real domestic money demand  causes income to fall and domestic currency to appreciate. If the rise in real domestic money supply is permanent, it will lead eventually to a fall in the home price level.

Under a fixed exchange rate, the change in real money demand does not affect the economy at all. To prevent the home currency from appreciating, the central bank buys foreign reserves with domestic money until the real money supply rises by an amount equal to the rise in real money demand. This intervention has the effect of preventing any change in output or the price level.