ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The objective of exchange stability is achieved through establishing equilibrium in the balance of payments. Monetary policy plays an important role in bringing balance of payments equilibrium without disturbing the stable exchange rate.

Detailed explanation-2: -Monetary policy, which is headed by the Federal Reserve and involves changing the money supply and credit availability to individuals can also affect the exchange rates. Similar to fiscal policy, it can affect the exchange rates through three paths: income, prices, and interest rates.

Detailed explanation-3: -Key Takeaways. Higher interest rates in a country can increase the value of that country’s currency relative to nations offering lower interest rates. Political and economic stability and the demand for a country’s goods and services are also prime factors in currency valuation.

Detailed explanation-4: -Monetary policy is enacted by a central bank to sustain a level economy and keep unemployment low, protect the value of the currency, and maintain economic growth. By manipulating interest rates or reserve requirements, or through open market operations, a central bank affects borrowing, spending, and savings rates.

Detailed explanation-5: -A monetary policy (change in M S) has no effect on GNP or the exchange rate in a fixed exchange system. As such, the trade balance, unemployment, and interest rates all remain the same as well. Monetary policy becomes ineffective as a policy tool in a fixed exchange rate system.