Managed Exchange Rates
Exchange Rates
AO2·AO4·Diagram required
Syllabus requirement
Covers how managed (dirty float) systems work, including overvalued and undervalued currencies.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagram showing determination of exchange rate in a managed float system and government intervention.
Summary
Managed exchange rates are systems where a government or central monetary authority intervenes occasionally in the foreign exchange market to influence the exchange rate, while allowing market forces to determine it most of the time. Governments use tools such as buying or selling currency, or maintaining bands (a crawling peg), to prevent large unexpected fluctuations, support exporters or control inflation, which affects trade competitiveness and confidence in the economy.