Introductory Macroeconomics

Book: Introductory Macroeconomics

Chapter: 6. Open Economy Macroeconomics

Subject: Social Science - Class 12th

Q. No. 8 of Exercises

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Would the central bank need to intervene in a managed floating system? Explain why.

Under a managed floating rate system the central bank intervenes by entering the market as a bulk buyer or seller. When the floating rate is too high central bank starts selling foreign exchange from its reserve to bring the rate down. When rate is too low it starts buying foreign exchange so as to raise the rate. This is done in the interest of importers and exporters.

Thus the central bank intervention is an attempt to moderate exchange rate movement.


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