Under the managed floating exchange rate system, a government may be able to reduce the international value of its currency by:
A)selling its currency in the foreign exchange market.
B)buying its currency in the foreign exchange market.
C)selling foreign currencies in the foreign exchange market.
D)increasing its domestic interest rates.

Question

Quizplus · Accepted Answer

Under a managed floating exchange rate system, the government has some control over the value of its currency. In order to reduce the international value of its currency, the government can sell its currency in the foreign exchange market. This increases the supply of its currency, which in turn can lower its value relative to other currencies. Buying its own currency or selling foreign currencies would have the opposite effect of what is desired (i.e. increasing the value of its currency). Increasing domestic interest rates may attract foreign investment, but this would strengthen the currency rather than weaken it.

Under the Managed Floating Exchange Rate System, a Government May