Open Economy Macroeconomics - Class 12 Commerce Economics - Extra Questions

Very Short Answer Type Questions:
Give meaning of managed floating exchange rate. 

Managed floating is a tool employed by the Central bank to restore the value of the country's currency in relation to other countries within the desired limits, even when the exchange rate is determined by the market forces of demand and supply.


Distinguish between sunk capital and floating capital.

Sunk Capital -
Sunk capital is that category of capital which can be used to produce only one type of commodity or services. Examples: An ice factory, oil mill etc.

Floating Capital -
Floating capital includes all such items which can be put to alternate uses. The use of such commodities is not restricted for any specific purpose. Examples: Money, fuels, etc.


What will be the effect of the following on the Balance of Payments: (i) 'Make in India' Programme' (ii) Import of Pulses.

(i) 'Make in India' will increase supply (inflow) of foreign exchange in India, causing improvement in the balance of payments position. 
(ii) Import of pulses will lead to outflow of foreign exchange from the country, causing adverse effect o balance of payment position.


State the effect of rise in the price of foreign currency on the Balance of Payments situation.

Rise in price of foreign currency will make imports costlier. So, imports will fall and it will be favourable for Balance of Payments as demand for foreign exchange will fall.


Should a current account deficit be a cause for alarm? Explain.

Since deficit in current account is met by the surplus of capital account, it is not taken as a cause for alarm.


What are official reserve transactions? Explain their importance in the balance of payments.

Official reserve transactions refer to transactions by the central bank that cause changes in its official, reserves of foreign exchange. Such transactions take place when a country withdraws from its stock of foreign exchange reserves to finance deficit in its overall balance of payments (BOP). A country with surplus in its overall BOP leads to rise in foreign exchange reserves. 
Official reserve transactions are very important as they help to bring a balance in the country's overall balance of payments. So, such transactions act as accommodating Item in BOP.


Why does the demand for foreign currency fall and supply rises when its price rises? Explain. 

When price of foreign exchange rises, import becomes costlier, demand for imports will fall. As a result demand for foreign currency falls. 
When price of foreign exchange rises, domestic goods become cheaper for foreign buyers, because they can now buy more from one unit of foreign currency. As a result demand for exports rise, leading to increase in supply of foreign exchange.
Thus, it can be concluded, that the demand for foreign currency and its price has an inverse relationship, while, supply has a direct relationship with the price of foreign exchange.


Why are foreign exchange rate and supply of foreign exchange directly related? Explain. 

When foreign exchange rate rises, domestic goods becomes cheaper for foreign buyers. This raises demand for exports, causing rise in supply of foreign exchange. Similarly, when foreign exchange rate falls, domestic goods become costlier for foreign buyers, decreasing demand for the exports, causing fall in supply of foreign exchange. Thus, foreign exchange rate and supply of foreign exchange are directly related.


Visits to foreign countries for sightseeing etc. by the people of India is on the rise. What will be its likely impact on foreign exchange rate and how? 

Visits to foreign countries will raise the demand for foreign exchange. Supply of foreign exchange remaining unchanged, exchange rate is likely to rise.


'Devaluation and Depreciation of currency are one and the same thing'. Do you agree? How do they affect the exports of a country?

Devaluation is the fall in the value of domestic currency in relation to foreign currency as planned by the government in a situation when exchange rate is not determined by the forces of demand and supply, but is fixed by the government of different countries. 
Whereas, Depreciation is the fall in the value of domestic currency in relation to foreign currency in a situation when exchange rate is determined by the forces of demand and supply in the international currency market. 
As a general phenomena, any depreciation/devaluation of currency may result into increase in exports of the goods and services from the country since it would increase the global competitiveness of the goods by making them cheaper.


What will be the effect of foreign investments in India on exchange rate? Explain. 

Foreign investment adds to supply of foreign exchange. Demand remaining unchanged, it brings downward influence on the exchange rate.


How does giving incentives for exports influence foreign exchange rate? Explain. 

Incentives for exports are aimed at increasing exports. Increase in exports will bring more foreign exchange into the country. Demand for foreign exchange remaining unchanged, exchange rate is likely to fall. 


State whether the following items constitute demand or supply of foreign exchange:
(i) Indian going to USA for medical treatment. 
(ii) Donation of 500 Million $ received from Microsoft.
(iii) Import of goods from China.
(iv) Indian students going to Australia for MBA.
(v) Foreign Tourists to India to visit Taj Mahal.
(vi) Purchase of land in England.  
(vii) Bought 500 Pounds to sell for speculation.

Demand for Foreign Exchange: (i); (iii); (iv); (vi); and (vii). 
Supply of Foreign Exchange: (ii); (v).  


Why does demand for foreign exchange arise for speculative activities?  

Demand for foreign exchange arises when people want to speculate on the value of foreign currency. Speculators demand foreign currency in the present period with the aim of selling it in future at higher prices. For example, Manish purchases $$1,000 US$ $$ at $$Rs. 50$$ per dollar with the expectation of selling the dollars at higher prices.


Foreign exchange rate in India is on the rise recently. What impact is it likely to have on exports and how? 

Rise in foreign exchange rate means that one unit of foreign currency is worth more rupees than earlier. So one unit of foreign currency can now buy more goods and services from India. It makes Indian exports cheaper to the foreign buyers. This is likely to increase exports. 


A policy initiated by the Indian Government had an adverse impact on the value of Rupee in relation to foreign exchange. What does this indicate? Discuss this with the help of a numerical example. Also explain its effect on the exports and imports of the economy.

Adverse Impact on the value of Rupee in relation to Foreign Exchange is known as 'Depreciation' of domestic currency. 
Numerical Example: Suppose, earlier, $$1$ =Rs. 60$$. If after the policy, the exchange rate changes to $$1$ = Rs. 65$$, then it indicates that rupee has depreciated. 
Effect on Exports: Due to depreciation of domestic currency, more goods can be purchased from India with same amount of foreign currency. It means, exports from India will increase as they will become relatively cheaper. 
Effect on Imports: It will result in decrease in imports as foreign goods will become costlier now. 


The Indian government launched 'Incredible India' or 'Atulya Bharat' campaign to promote tourism in India. How will it affect the price of foreign exchange? 

The launch of 'Incredible India' campaign will lead to increase in supply of the foreign exchange in India (due to increase in foreign tourists). It will result in decrease in price of the foreign exchange.


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

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. 


What is meant by visible items?

Visible items refer to those items which are made of some matter or material and can be seen, touched and measured. For example, jute, cotton, etc. 


How is the exchange rate determined under a flexible exchange rate regime? 

Flexible rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.


Very Short Answer Type Questions 
What is meant by foreign exchange rate? 

Foreign exchange rate is the rate at which the domestic currency can be exchanged for foreign currency. Some economists refer to it as the external value of the domestic currency.


The Balance of trade shows a deficit of $$ Rs. 300$$ crores. The value of exports are $$ Rs. 500 $$ crores. What is the value of imports?

Balance of trade = Exports- Imports 
So, Imports = Exports - Balance of trade = $$ 500 -(-) 300 = Rs. 800 $$ crores


Very Short Answer Type Questions 
What is foreign exchange?

Foreign exchange refers to the currencies of different countries, except the domestic currency of the country. We can say, foreign exchange is a system dealing with the currencies of different countries. The rate of domestic currency which can be exchanged for foreign currency is known as foreign exchange rate.


What is the meaning of invisible items? 

Invisible items refer to those items which cannot be seen, felt, touched or measured. For example, services of shipping, banking, insurance, etc.


Identify the following items as visible or invisible:
(a) Export of jute; (b) Export of software services.

(a) Visible item; (b) Invisible item.


Very Short Answer Type Questions:
Mention two reasons for the people to acquire foreign exchange. 

Two reasons for the people to acquire foreign exchange are:
1)Imports: It requires foreign exchange because payments for imports are made in foreign exchange only.
2)Foreign Investment: Investment in rest of the world is an important business activity. We need foreign currency in which investment is to be made.



Very Short Answer Type Questions:
Mention the effects of exchange depreciation on exports.

Currency depreciation leads to increase in exports.


Very Short Answer Type Questions 
What is meant by depreciation of domestic currency?

Currency depreciation refers to decrease in the value of domestic currency in terms of foreign currency.


What are the two main components of the Balance of Payments account?

(i)Current account (ii) Capital account.


Very Short Answer Type Questions:
What is a fixed exchange rate?

Fixed rate of exchange refers to the rate of exchange as fixed by the government.  Historically, it has two variants; Gold standard system of exchange rate and Bretton woods system of exchange rate.


Very Short Answer Type Questions:
Give the meaning of currency appreciation.

Currency appreciation refers to increase in the value of domestic currency in terms of foreign currency.  


State the components of current account? 

The components of current account are: 
(i) Export and import of Goods;
(ii) Export and import of Services;
(iii) Unilateral Transfers to and from abroad; 
(iv) Income receipts and payments to and from abroad.


Very Short Answer Type Questions:
What is floating exchange rate?

Floating rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international currency market.


Very Short Answer Type Questions:
Define flexible exchange rate system.

Flexible rate of exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international currency market.


Very Short Answer Type Questions:
Name the two sources of demand or outflow of foreign exchange.

Two sources of demand or outflow of foreign exchange are:
1)Imports: It requires foreign exchange because payments for imports are made in foreign exchange only.
2)Foreign Investment: Investment in rest of the world is an important business activity. We need foreign currency in which investment is to be made.




Very Short Answer Type Questions:
Why does supply curve of foreign exchange slope upwards? 

The foreign exchange rate and supply of foreign exchange is positively related and it is upward sloping curve as because the components of supply of foreign exchange rise as foreign exchange rate rises. For example, exports rise as the foreign exchange rate rises.


Very Short Answer Type Questions:
State the three functions of foreign exchange market. 

Functions of foreign exchange market are:
1) Transfer function : It implies transfer of purchasing power in terms of foreign exchange across different countries of the world.
2) Credit function: It implies provision of credit in terms of foreign exchange for the export and import of goods and services across different countries of world.
3) Hedging function: It implies protection against the risk related to fluctuations in foreign exchange rate.


How Is a deficit or a surplus on the current account restored? 

Deficit on the current account is restored through the surplus on capital account and surplus on the current account is restored through the deficit on capital account.


Very Short Answer Type Questions:
What are the two ways in which foreign exchange can flow into the domestic market?

(i) Exports of Goods and Services; 
(ii) Unilateral transfers from abroad.


Very Short Answer Type Questions:
What will be the effect on imports if foreign exchange rate increases?

Rise in foreign exchange rate makes domestic currency cheaper. This makes foreign country to increases their imports from the domestic country. As a result, supply of foreign exchange currency rises.


Very Short Answer Type Questions:
How can Reserve Bank of India help in bringing down the foreign exchange rate which is very high? 

Reserve Bank of India can increase the supply of foreign exchange by selling foreign exchange from its reserves to bring down its value.


Very Short Answer Type Questions:
Give the meaning of forward exchange rate.

Forward exchange rate is that exchange exchange rate at which forward transactions are to be honoured. It is a sort of contract exchange rate to be applicable for the transactions which are to be signed today but are to be honoured on a specific date in the future.


Very Short Answer Type Questions:
The price of $$1\ US$$ Dollar has fallen from $$Rs. 50$$ to $$Rs. 48$$. Has the Indian currency appreciated or depreciated? 

Indian currency is appreciating when the price of one dollar has fallen from Rs 50 to Rs 48, as less rupees are needed to buy one dollar. It is a situation of a rise in exchange rate for Indian rupee.


What is meant by deficit in balance of payments?

Deficit in balance of payments account arises when total inflows (receipts) on account of autonomous transactions are less than total outflows (payments) on account of such transactions.


Very Short Answer Type Questions:
What is meant by spot exchange rate? 

The spot rate of exchange or current rate of exchange is that rate which happens to prevail at the time when transactions are incurred. Spot market is of daily nature. It does not trade in future deliveries.


Short Answer Type Questions:
Explain two sources each of demand and supply of foreign exchange.

Two sources of demand or outflow of foreign exchange are:
1)Imports: It requires foreign exchange because payments for imports are made in foreign exchange only.
2)Foreign Investment: Investment in rest of the world is an important business activity. We need foreign currency in which investment is to be made.
Two sources of supply of foreign exchange are :
1) Exports: Exports of goods and services is an important source of supply of foreign exchange.
2)Grants and donations from rest of the world: A significant amount of foreign exchange flows from rich to poor countries by way of grants and donations.


Short Answer Type Questions:
Give two reasons for rise in demand for a foreign currency when its price falls. 

Two reasons for rise in demand for a foreign currency when its price falls are:
1) When a foreign currency becomes cheaper in terms of the domestic currency, it promotes tourism to that country. As a result, demand for foreign currency rises.
2) When price of a foreign currency falls, its demand rises as more people want to make gains from speculative activities.


Short Answer Type Questions:
Give the meaning of:
(i) Foreign Exchange;
(ii) Foreign Exchange Rate;
(iii) Foreign Exchange Market.

Foreign exchange refer to the currencies of different countries. We can say, foreign exchange is a system dealing with the currencies of different countries.

Foreign exchange rate is the rate of domestic currency which can be exchanged for foreign currency. Some economists refer to it as the external value of the domestic currency.

Trading of currencies of different countries take place in foreign exchange market. It is a highly decentralized global market. The forces of foreign exchange market determines the foreign exchange market.


Very Short Answer Type Questions:
What is 'devaluation'?

Devaluation is said to occur when the exchange rate is increased by the government under fixed exchange rate system.


Very Short Answer Type Questions:
Name the market exchange rate system in which the Central Bank can actively intervene. 

Fixed rate of foreign exchange the market exchange system in which the central bank an actively intervene as fixed rate of exchange is the rate of exchange as fixed by he government.


Short Answer Type Questions:
Explain how 'Depreciation of currency' promotes exports of a country?

Depreciation of domestic currency is a situation of a rise in exchange rate. More rupees re needed to buy one dollar. It leads to rise in exports as the export is a component of the supply of foreign exchange.


What is meant by trade deficit? 

The excess of imports of goods over exports of goods is known as trade deficit.


Short Answer Type Questions:
Briefly discuss the concepts of currency appreciation and currency depreciation.

Currency appreciation is a situation of a fall in exchange rate. Less rupees are needed to buy one dollar. Increase in supply and decrease in demand for foreign exchange cause appreciation of domestic currency.
Currency depreciation is a situation of a rise in exchange rate. More rupees are needed to buy one dollar. Increase in demand and decrease in supply for foreign exchange cause depreciation of domestic currency.


Short Answer Type Questions:
What is meant by foreign exchange rate? Why does a rise in foreign exchange rate cause a rise in its supply?

Foreign exchange rate is the rate of domestic currency which can be exchanged for foreign currency. Some economists refer to it as the external value of the domestic currency.
The foreign exchange rate and supply of foreign exchange is positively related and it is upward sloping curve as because the components of supply of foreign exchange rise as foreign exchange rate rises. For example exports rise as the foreign exchange rate rises.


Short Answer Type Questions:
What is meant by foreign exchange rate? Give three reasons why people desire to have foreign exchange. 

Foreign exchange rate is the rate of domestic currency which can be exchanged for foreign currency. Some economists refer to it as the external value of the domestic currency.
Three sources of demand or outflow of foreign exchange are:
1)Imports: It requires foreign exchange because payments for imports are made in foreign exchange only.
2)Foreign Investment: Investment in rest of the world is an important business activity. We need foreign currency in which investment is to be made.
3)Direct purchase Abroad: Foreign exchange is needed to make direct purchases of goods and services from abroad.


Short Answer Type Questions:
What is meant by fixed exchange rate system and flexible exchange rate system? 

Fixed rate of exchange refers to the rate of exchange as fixed by the government.  Historically, it has two variants; Gold standard system of exchange rate and Bretton woods system of exchange rate.
Flexible rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.


Short Answer Type Questions:
Give the meaning of foreign exchange rate. How is it determined under flexible exchange rate regime? 

Foreign exchange rate is the rate of domestic currency which can be exchanged for foreign currency. Some economists refer to it as the external value of the domestic currency.
Flexible rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.


Short Answer Type Questions:
Distinguish between fixed and flexible exchange rate.

Fixed rate of exchange refers to the rate of exchange as fixed by the government.  Historically, it has two variants; Gold standard system of exchange rate and Bretton woods system of exchange rate.
Flexible rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.


How is balance of payment  measured? Explain.

The BOP is reported for a quarter or a year. A balance of payments deficit means the country imports more goods, services and capital than it exports. It must borrow from other countries to pay for its imports. In the short-term, that fuels the country's economic growth,
Mathematically, the balance of payments formula is represented as, Balance of Payments (BOP) Formula = Balance of current account + Balance of capital account + Balance of financial account.


Short Answer Type Questions:
Distinguish between devaluation and depreciation of domestic currency.

Currency depreciation is a situation of a rise in exchange rate. More rupees are needed to buy one dollar. Increase in demand and decrease in supply for foreign exchange cause depreciation of domestic currency.
Devaluation is an official lowering of the value of a country's currency within a fixed exchange rate system.


Short Answer Type Questions:
Write short notes on: (i) Spot market; (ii) Forward market. 

The spot rate of exchange or current rate of exchange is that rate which happens to prevail at the time when transactions are incurred. Spot market is of daily nature. It does not trade in future deliveries.
Forward market for foreign exchange is that market which handles such transactions of foreign exchange that are meant for future delivery. Such transactions are signed today but are to be honored on some future date.


Short Answer Type Questions:
When price of a foreign currency rises, its supply also rises. Explain why.

The foreign exchange rate and supply of foreign exchange is positively related and it is upward sloping curve as because the components of supply of foreign exchange rise as foreign exchange rate rises. For example exports rise as the foreign exchange rate rises.


Short Answer Type Questions:
Explain the effect of appreciation of domestic currency on imports. 

Appreciation of domestic currency is a situation of a fall in exchange rate. Less rupees re needed to buy one dollar. It leads to rise in imports as the import is a component of the demand of foreign exchange.


Short Answer Type Questions:
What are fixed and flexible exchange rates?

A fixed exchange rate is a rate which is maintained and controlled by the central government. Under this system, the value of currency is fixed against different currencies to ensure stability in exchange rate and promote foreign trade.
 
A Flexible exchange rate is a rate which is determined by the market force. It is controlled by demand and supply forces, which is why it is called as free rate of exchange. There is a minimum or no government intervention, and the government does not hold any reserves. There is no problem of overvaluation or undervaluation of currency.


Short Answer Type Questions:
Explain the meaning of Managed Floating Exchange Rate. 

Managed floating is a tool employed by the Central bank to restore the value of the country's currency in relation to other countries within the desired limits, even when the exchange rate is determined by the market forces of demand and supply.


Long Answer Type Questions :
Discuss in brief: (i) Fixed exchange rate system; (ii) Flexible exchange rate system; and (iii) Managed floating rate system. 

Fixed rate of exchange refers to the rate of exchange as fixed by the government.  Historically, it has two variants; Gold standard system of exchange rate and Bretton woods system of exchange rate.
Flexible rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.
Managed floating is a tool employed by the Central bank to restore the value of the country's currency in relation to other countries within the desired limits, even when the exchange rate is determined by the market forces of demand and supply.


Long Answer Type Questions :
Distinguish between the fixed exchange rate and the floating exchange rate. If exchange rate falls, explain its effects on exports and imports.

Fixed rate of exchange refers to the rate of exchange as fixed by the government.  Historically, it has two variants; Gold standard system of exchange rate and Bretton woods system of exchange rate.
Flexible or floating rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.
When the exchange rate falls, imports rise since import is a component of the dmand of foreign exchange and exports fall as export is a component of the supply of foreign exchange.


Long Answer Type Questions :
Explain the distinction between the flexible exchange rate and the managed floating exchange rate. 

Flexible rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.
Managed floating is a tool employed by the Central bank to restore the value of the country's currency in relation to other countries within the desired limits, even when the exchange rate is determined by the market forces of demand and supply.


Long Answer Type Questions :
"Equilibrium rate of exchange is determined when the demand for foreign exchange is equal to its supply." Explain this statement, 

The equilibrium exchange rate determined in the foreign exchange market is determined by the flexible rate of exchange.Flexible rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market. Thus, equilibrium exchange rate is determined when the demand and supply for foreign exchange becomes equal.


(a) Define Trade Surplus and Trade Deficit.
(b) Discuss briefly the concept of managed floating system of foreign exchange rate determination.

a) Trade surplus is the situation when the exports of goods and services exceed the imports of goods and services.

Trade deficit: Trade surplus is the situation when the exports of goods and services fall short of the imports of goods and services.

b) Managed floating exchange rate system is a combination of a fixed exchange rate system and the floating exchange rate system.

The foreign exchange market is allowed to freely operate.

They have to follow an official declaration of rules for intervention by the central monetary authority of the country.

This type of exchange rate system determines the exchange rate by the forces of the market with regular intervention by the monetary authority of the country.



What do you understand by devaluation of rupee?

Devaluation of the rupee refers to a reduction in the value of the domestic currency by the government. It increases exports and reduces imports as imports become costlier.


Current account and ______ account are two main accounts on the balance of payment.

Current account and capital account are two main account on the balance of payment. The current account represents a country's net income over a period of time, while the capital account records the net change of assets and liabilities during a particular year.


The capital that is consumed by an economy or a firm in the production process is known as ____________.

The capital that is consumed by an economy or a firm in the production process is known as depreciation. It means decline in the value of fixed assets due to use, passage of time or obsolescence or diminution in intrinsic value of the asset due to use and/or lapse of time.


Which bank controls foreign exchange?

The Reserve Bank of India, is the custodian of the country's foreign exchange reserves and is vested with the responsibility of managing their investment. The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.


(a) In which sub-account and on which side of balance of payments account will foreign investments in India be recorded? Given reasons.
(b) What will be the effect of foreign investments in India on exchange rate? Explain. 


(a) In Capital account, and on credit side of BOP, foreign investments in India will be recorded. Foreign investment refers to the investment in the assets of a foreign country. By investing, the government or any resident of domestic country owns the control over the asset of the foreign country. Foreign Investment cause an inflow of foreign exchange into the country. Thus, it is recorded as positive items in the Capital Account of BOP.

(b) Foreign investments in India will increase the supply of foreign currency. This would shift the supply curve from $$SS$$ to $$S'S$$. With the shift in supply curve, the new equilibrium is established at point E, where the exchange rate falls from $$OR$$ to $$OR_1$$ and the demand and supply of foreign currency rises to $$QQ_1$$. 

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What is meant by depreciation of domestic currency?

Currency depreciation implies that domestic currency has become less expensive in terms of foreign currency. If, in the initial situation. $$\$1 = Rs. 40 $$
and in the final situation, $$\$1 = 50$$ then, 
rupee is depreciating against dollar. This is because now $$\$1$$ can be used to purchase Rs 50 instead of Rs 40. Thus, rupee has become less expensive. 


Explain the meaning of Managed Floating Exchange Rate. 

Managed floating exchange rate is a mixture of a flexible exchange rate (the float part) and a fixed exchange rate (the Managed part).
In other words, it refers to a system in which foreign exchange is determined by free market forces (demand and supply forces), which can be influenced by the intervention of the central bank in foreign exchange market.
Under this system, also called Dirty floating, central banks intervene to buy or sell foreign currencies in an attempt to stabilize exchange rate movements in case of extreme appreciation or depreciation.


Class 12 Commerce Economics Extra Questions