In managed floating How Central Bank exercise float or market exchange rate ? Explain in brief with diagram 6 marks q.
Dear student,
Managed floating system combines the features of both flexible and fixed exchange rate system. Under managed floating system, exchange rate is determined by market forces with intervention of monetary authorities. The central bank interferes only when rate of exchange becomes rather too high or low. The Central bank intervenes in influencing exchange rate through sale and purchase of foreign currency in international money market. When market value of domestic currency highly depreciates against value of US dollar, The central bank sells foreign currency in international market to restore the value of domestic currency. By selling dollar, bank expects to increase supply of dollar in market to reduce the price of dollar in relation to domestic currency. On the other hand if market value of domestic currency excessively rise in comparison to foreign currency which cause a fall in foreign demand of domestic goods, the central bank starts buying foreign currency in order to raise its demand, when demand of foreign currency increase, its price increases in relation to domestic currency which help to restore foreign demand of domestic goods.
Regards
Managed floating system combines the features of both flexible and fixed exchange rate system. Under managed floating system, exchange rate is determined by market forces with intervention of monetary authorities. The central bank interferes only when rate of exchange becomes rather too high or low. The Central bank intervenes in influencing exchange rate through sale and purchase of foreign currency in international money market. When market value of domestic currency highly depreciates against value of US dollar, The central bank sells foreign currency in international market to restore the value of domestic currency. By selling dollar, bank expects to increase supply of dollar in market to reduce the price of dollar in relation to domestic currency. On the other hand if market value of domestic currency excessively rise in comparison to foreign currency which cause a fall in foreign demand of domestic goods, the central bank starts buying foreign currency in order to raise its demand, when demand of foreign currency increase, its price increases in relation to domestic currency which help to restore foreign demand of domestic goods.
Regards