Answer to Question #284222 in Macroeconomics for Mahad

Question

Why the Central Bank of the trading partner may option for a fixed exchange rate regime. If the exchange rate were to be fixed between the initial and the new equilibrium values in domestic economy, what do you think the policy would imply? What effects would it have on the home economy and the trading partner?

Answer 1

A fixed exchange rate helps to ensure the smooth flow of money from one country to another. It helps smaller and less developed countries to attract foreign investment.

If the exchange rate were to be fixed between the initial and the new equilibrium values in domestic economy, then the new equilibrium values will not affect the initial ones.