Question

why China cannot have an independent monetary policy reaction curve with a fixed currency?

Answer 1

China cannot have an independent monetary policy reaction curve with a fixed currency. This is because when the exchange rate in the economy is fixed, then the Central bank of the country has to keep a constant check on the currency movements and change the level of money supplied in the economy in accordance with the movements in the exchange rate of the nation. Thus, reaction of the monetary policy is not independent and depends on the movements in the exchange rate. With a fixed exchange rate system, any country cannot have an independent monetary policy reaction curve. Thus, China cannot have an independent monetary policy reaction curve with a fixed currency.