Question

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

Answer 1

In a managed floating system, foreign exchange rate is determined by market forces. However, the central bank needs to intervene in this system in order to restrict the fluctuations in the exchange rate within certain limits. The aim is to keep exchange rate close to desired target values. For this, central bank maintains reserves of foreign exchange to ensure that the exchange rate stays within the targeted value.