A lively debate in international economics is that countries arguing in favour of free trade and globalization should operate a flexible exchange rate policy, e.g. the dollar and sterling should be freely floating without government intervention. However, the relative effectiveness of monetary policy can be very different under flexible exchange rate regime, and thus a flexible exchange rate regime may not be perfectly suitable for the trading partners of leading industrialized countries like the US and the UK.

a.Critically discuss the advantages and disadvantages of fixed and flexible exchange rates, respectively?

( 250words)

b.Using appropriate models and diagrams to illustrate, describe the relative effectiveness of expansionary fiscal and monetary policy under fixed exchange rates.

(300words)