A Country Can Operate a Fixed Exchange Rate and Practice

question 23

Multiple Choice

A country can operate a fixed exchange rate and practice independent monetary policy if and only if

• A) it eliminates all tariffs
• B) it targets a zero inflation rate
• C) it imposes wage and price controls
• D) it restricts inflows and outflows of financial capital
• E) the central bank agrees to monetarize all fiscal deficits

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Definitions:

Externalities

Externalities are indirect effects of economic activities on third parties, which can be either positive or negative.

Negative Externality

A situation where a third party is adversely affected by the outcome of a transaction or activity between others, not compensated by those causing the impact.

Acid Rain

Acid rain is precipitation with a high concentration of acidic components, typically resulting from industrial emissions that affect water, soil, and living conditions adversely.

Tradable Pollution Permits

Licenses that allow the holder to emit a certain amount of pollution that can be bought and sold, aiming to reduce overall pollution in a cost-effective manner.