Workers are demanding higher wages because of the risks associated with the Covid-Virus. Employers give-in and offer higher wages to compensate for the greater risks in the work place but then raise output prices to cover their higher costs. Now that the price level is higher, real Central Bank balances are lower, the following strategy is pursued: To prevent higher interest rates appreciating the currency and hurting exports, the Central Bank decides to purchase foreign currencies and expand the money supply. This action has accommodated the initial higher wage demand with monetary growth and the economy moves to a higher level of wages and prices. Is this an argument against adopting a fixed exchange rate? What Do you think by adopting a fixed exchange rate rather than having a floating rate, the scope for managing domestic monetary policy is reduced?

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Yes the scenario you described presents an argument against adopting a fixed exchange rate regime When workers demand higher wages due to the increase... View the full answer