Question

What is the extent of intervention by the central bank under a flexible exchange rate system?

Answer 1

Central banks often intervene discreetly and sparingly in a system with a flexible exchange rate, primarily to reduce exchange rate volatility and prevent unjustified swings. The main goal is to maintain stability and avoid sharp swings that could disturb the trade and financial markets.

Answer 2

Under a flexible exchange rate system, the central bank does not intervene regularly in the foreign exchange market.

• The exchange rate is determined by market forces of demand and supply for foreign currencies.
• The central bank may intervene occasionally to control excessive volatility or speculation, but it generally allows the rate to adjust freely based on economic conditions.

The extent of intervention is minimal in a flexible exchange rate system, unlike the active intervention seen under a fixed exchange rate system.