Question

What is the effect of Monetary Policy under Fixed Exchange Rate and Flexible Exchange Rate regime? Explain

it using IS-LM analysis.

Answer 1

A monetary policy (change in money supply) has no effect on GDP or the exchange rate in a fixed exchange system. As such, the trade balance, unemployment, and interest rates all remain the same as well.

But under Flexible Exchange Rate regime an increase in money supply will increase GDP and vice versa.