Question : In a managed exchange rate system, the central bank of a country may intervene to influence the exchange rate by buying or selling its currency in the foreign exchange market. This intervention is aimed at ________.
Option 1: maintaining price stability
Option 2: promoting economic growth
Option 3: controlling inflation
Option 4: managing trade imbalances
Correct Answer:
maintaining price stability
Solution : The correct answer is (a) maintaining price stability.
In a managed exchange rate system, the central bank of a country intervenes in the foreign exchange market to influence the value of its currency. This intervention is primarily aimed at maintaining price stability, ensuring that the exchange rate remains within a desired range.
By buying or selling its currency in the foreign exchange market, the central bank can increase or decrease the supply of the currency, which in turn affects its value relative to other currencies. The central bank may intervene to prevent excessive volatility or rapid movements in the exchange rate that could disrupt the economy and create instability.
While promoting economic growth, controlling inflation, and managing trade imbalances are important objectives for central banks, in the context of a managed exchange rate system, the primary focus of intervention is typically on maintaining price stability through exchange rate management.
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