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a central bank is dedicated to maintaining a fixed exchange rate, and the is* curve is steady. in this case, an attempt to increase the money supply will put pressure on the exchange rate, which will force the central bank to must intervene and sell foreign exchange to buy domestic currency.
The exchange rate no longer varies in proportion to the reference currency under fixed exchange rate or currency board regimes. Given that the indigenous currency is abolished, there isn't truly an exchange rate under a dollarization regime.
When a nation accepts one of these systems, its independence in monetary policy ends. In the event of a fixed exchange rate, currency board, or dollarization, the nation that issues the currency that is used determines its monetary policy in a sovereign manner, leaving the domestic nation at its whim. This does not take place within a monetary union.
A Fixed Exchange Rate: What Is It?
A fixed exchange rate is a system used by a government or central bank that links the value of the nation's official currency to the currency of another nation or the price of gold. A fixed exchange rate system's goal is to maintain a currency's value within a specific range.
For exporters and importers, fixed rates offer more assurance. In addition, fixed rates assist the government in preserving low inflation, which, over time, lowers interest rates and promotes investment and commerce.
The majority of large industrialised countries have had floating exchange rate regimes, in which the price of a currency is determined by its current value on the foreign exchange market (forex). While fixed-rate systems are still used in developing economies, this trend started in these countries in the early 1970s.
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