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Question
"Under the flexible exchange rate system, the Central Bank does not intervene in the foreign exchange market."
Justify the statement, giving valid arguments.
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Solution
Yes, the Central Bank does not intervene in the currency market under the flexible exchange rate regime.
- The exchange rate is determined by market forces, such as demand and supply of foreign money, in a flexible exchange rate system.
- The rise in the foreign exchange rate is caused by an increase in demand and a decrease in supply of foreign currency.
- The reduction in the foreign exchange rate is caused by a decrease in demand and an increase in supply of foreign exchange.
- Imports, direct purchases overseas, investment in the rest of the globe, repayment of international debts, and other factors influence forex demand.
- The supply of currency is determined by factors such as exports, direct purchases by the rest of the world, loans from the rest of the world, and so on.
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