The reason that MMT economists favour flexible exchange rates over the Bretton Woods system of fixed exchange rates is because
Answer: (a) Fiscal and monetary policy tools can target domestic policy outcomes and not be compromised by having to defend a particular exchange rate as was the case under Bretton Woods system.
The answer is Option (a)
The MOOC students were given visual and written material that provided an historical context to the modern fiat currency era.
This material gave students the understanding of how the Bretton Woods system worked and what it meant for government in terms of constraining policy space.
They learned how the fiat currency system evolved and opened up the fiscal space for governments beyond what had previously been available under the fixed exchange rate system.
The relevance here is that under the Bretton Woods system, central banks had to carefully manage the amount of their currencies in the system to ensure they maintained the agreed parities with other currencies.
An excess supply of say, Australian dollars (pounds before 1966) in foreign exchange markets required the Reserve Bank of Australia (RBA) to purchase dollars with foreign currency reserves and increase domestic interest rates to attract foreign investment (and demand for dollars).
But the money supply contraction and higher interest rates pushed unemployment up and if expansionary fiscal policy was used too aggressively to reduce unemployment - putting currency back in the system - it would compromise the RBA's efforts to maintain currency stability.
As a consequence, without an increase in gold reserves, increased government expenditure (injecting currency) had to be matched ('financed') by taxation and if they wanted to spend more than their tax revenue, they had to issue debt (draining currency).
The collapse of the Bretton Woods system dramatically altered the opportunities available to currency-issuing governments.
First, under a fiat monetary system, 'state money' no longer had any intrinsic value (no longer convertible into gold). For an otherwise 'worthless' currency to be acceptable in exchange (buying and selling things) some motivation was required. That motivation emerges because the sovereign government requires its use to relinquish private tax obligations.
Second, as the monopoly issuer of the fiat currency, the Bretton Woods restrictions to offset spending with taxation and/or borrowing are no longer binding because the central bank no longer has to defend the floating currency.
There is no financial constraint on government spending. The government can buy any goods and services that are available for sale in its currency including all idle labour.
The only meaningful constraint is the 'inflationary ceiling' that is reached when all productive resources are full employed. This is a dramatic change
So the answer is Option (a).