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Open Economy Macroeconomics — Economics STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceEconomicsOpen Economy Macroeconomics4 Marks
Question
Would the central bank need to intervene in a managed floating system? Explain why.
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Answer

It refers to a system in which foreign exchange rate is determined by market forces and central bank influences the exchange rate through intervention in the foreign market.
  1. It is a hybrid of a fixed exchange rate and a flexible exchange rate system.
  2. In this system, Central bank intervenes in the foreign exchange market to restrict the fluctuations in the exchange rate within certain limits. The aim is to keep exchange rate close to desired target values.
  3. For this, Central bank maintains reserves of foreign exchange to ensure that the exchange rate stays within the targeted value.
  4. It is known as 'Dirty Floating'.

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