Question

what is the role of central bank in the following exchange rate

• fixed exchange
• floating exchange
• managed floating

Answer 1

Dear Student,

The role of the Central Bank in maintaining the foreign exchange rates under different regimes is:

a) Fixed exchange rate system: A Central Bank more often uses its foreign currency reserves to maintain the officially determined exchange rate.

b) Floating exchange rate system: A Central Bank does not maintain any reserves of foreign currency as the market automatically adjusts to determine the market driven exchange rate.

c) Managed Floating: A Central Bank enters the foreign exchange market to buy/sell foreign currency in order to control fluctuations and volatility in the market.