Managed Float: Understanding Exchange Rate Policy

Question 1

Which of the following is the primary objective of a managed float exchange rate system?

Accepted Answer

Maintaining a predictable target range for the exchange rate within which it is allowed to fluctuate

Answer

Stabilizing the exchange rate at a fixed level

Answer

Allowing the exchange rate to fluctuate freely without intervention

Answer

Fixing the exchange rate to a foreign currency

Question 2

What is the target range of the exchange rate in a managed float system generally based on?

Accepted Answer

A combination of these factors

Answer

The level of inflation

Answer

The level of interest rates

Answer

The balance of payments

Question 3

Which of the following is not a factor that affects the effectiveness of a managed float system?

Accepted Answer

The age of the population

Answer

The size of the economy

Answer

The level of foreign exchange reserves

Answer

The credibility of the central bank

Question 4

Which of the following is NOT a characteristic of a managed float exchange rate system?

Accepted Answer

Exchange rates are completely fixed and do not move.

Answer

Exchange rates fluctuate within a target range set by the central bank.

Answer

The central bank intervenes in the foreign exchange market to influence exchange rates.

Answer

The central bank uses monetary policy to achieve its target exchange rate.

Question 5

What is a primary objective of a managed float system?

Accepted Answer

Stabilizing exchange rates within a target range

Answer

Promoting economic growth

Answer

Maintaining a fixed exchange rate

Answer

Reducing the current account deficit

Question 6

Which of the following is NOT an objective of a managed float system?

Accepted Answer

Promoting economic growth directly

Answer

Maintaining exchange rate stability within a target range

Answer

Mitigating excessive exchange rate volatility

Question 7

Which of the following is a primary objective of a managed float system?

Accepted Answer

To maintain exchange rate stability without completely fixing it.

Answer

To prevent any fluctuations in the exchange rate.

Answer

To allow the exchange rate to depreciate freely.

Question 8

How does a central bank typically intervene in a managed float system?

Accepted Answer

By buying or selling domestic currency in the foreign exchange market.

Answer

By raising or lowering interest rates.

Answer

By imposing capital controls.

Question 9

Which of the following is a potential benefit of a managed float system?

Accepted Answer

It allows for some flexibility in exchange rate adjustment.

Answer

It completely eliminates exchange rate volatility.

Answer

It guarantees a stable exchange rate.

Question 10

What is a target range in the context of a managed float system?

Accepted Answer

A specified range within which the exchange rate is allowed to fluctuate.

Answer

A minimum level below which the exchange rate cannot fall.

Answer

A fixed value that the exchange rate must not exceed.

Question 11

Which of the following factors can influence the effectiveness of a managed float system?

Accepted Answer

Economic fundamentals, capital flows, and market sentiment.

Answer

Central bank intervention and monetary policy only.

Answer

Government regulations and fiscal policy only.

Question 12

How does a managed float system compare to a fixed exchange rate system?

Accepted Answer

It allows for greater exchange rate flexibility but potentially less stability.

Answer

It is more effective at preventing currency crises.

Answer

It requires less central bank intervention.

Question 13

What are some of the challenges associated with managing a managed float system?

Accepted Answer

Speculative attacks, political pressures, and economic shocks.

Answer

Inadequate central bank reserves and poor monetary policy only.

Answer

Excessive government spending and high inflation only.

Question 14

How can a managed float system affect international trade?

Accepted Answer

It can influence the competitiveness of exports and imports.

Answer

It always leads to an increase in exports.

Answer

It has no effect on trade volumes.

Question 15

How does the managed float system differ from a floating exchange rate system?

Accepted Answer

There is central bank intervention to influence exchange rates in a managed float system.

Answer

Central banks have no role in a floating exchange rate system.

Answer

Exchange rates are fixed in a managed float system.

Question 16

Compared to a fixed exchange rate system, a managed float system generally offers:

Accepted Answer

Greater flexibility for a country to respond to economic shocks and adjust its exchange rate as needed

Answer

A complete guarantee of exchange rate stability, eliminating all fluctuations

Answer

Elimination of the risk of speculative attacks on the currency

Question 17

In a managed float system, the target range of exchange rates within which the currency is allowed to fluctuate:

Accepted Answer

Varies depending on the specific policy objectives and economic conditions of the country

Answer

Never exceeds 10%, providing a narrow band of fluctuation

Answer

Is always above the market equilibrium rate to ensure a strong currency

Answer

Is typically fixed at around 2-3%, offering limited flexibility

Question 18

In a managed float system, exchange rates:

Accepted Answer

Fluctuate within a target range set by the central bank.

Answer

Are fixed to a specific currency.

Answer

Are determined solely by market forces.

Answer

Remain stable at all times.

Question 19

The primary objective of a managed float system is to:

Accepted Answer

Stabilize exchange rates and reduce volatility.

Answer

Control inflation by limiting currency fluctuations.

Answer

Promote economic growth through exports.

Answer

Reduce the risk of balance of payments crises.

Question 20

How does a managed float system differ from a fixed exchange rate system?

Accepted Answer

Exchange rates are allowed to fluctuate within a range, while in a fixed exchange rate system, they are pegged to a specific value.

Answer

The central bank has complete control over the exchange rate in both systems.

Answer

Interventions are made to prevent exchange rate volatility in both systems.

Question 21

In a managed float system, monetary policy is used to:

Accepted Answer

Influence exchange rates and keep them within the target range.

Answer

Reduce unemployment.

Answer

Stimulate economic growth.

Answer

Control inflation.

Question 22

A country might abandon a managed float system if:

Accepted Answer

It experiences a severe loss of foreign exchange reserves or loses credibility in its monetary policy.

Answer

The country experiences high levels of economic growth.

Answer

Political instability occurs.

Question 23

Which of the following is NOT an objective of a managed float system?

Accepted Answer

Eliminate exchange rate volatility

Answer

Maintain a stable and competitive exchange rate

Answer

Prevent excessive exchange rate instability

Answer

Foster economic growth

Question 24

Which of the following mechanisms is used in a managed float system?

Accepted Answer

Central bank intervention in the foreign exchange market through tools such as buying and selling currencies

Answer

Imposing capital controls

Answer

Fixing the exchange rate within a narrow band

Question 25

What is a key benefit of a managed float system compared to a fixed exchange rate regime?

Accepted Answer

Greater flexibility in adjusting the exchange rate to respond to changing economic conditions

Answer

Absolute certainty and stability in exchange rates

Answer

Complete elimination of exchange rate risk

Question 26

Which of the following is a potential disadvantage of a managed float system?

Accepted Answer

Increased exchange rate volatility and uncertainty, making it more challenging for businesses to plan and operate

Answer

Higher inflation

Answer

Reduced ability to attract foreign investment

Question 27

What is the role of the central bank in a managed float system?

Accepted Answer

To intervene in the foreign exchange market to maintain the exchange rate within a target range

Answer

To control the money supply

Answer

To set the official exchange rate

Question 28

What is the relationship between a managed float system and exchange rate stability?

Accepted Answer

Managed float systems aim to strike a balance between exchange rate flexibility and stability by allowing for adjustments while preventing excessive fluctuations

Answer

Managed float systems completely prevent exchange rate fluctuations

Answer

Managed float systems always lead to stable exchange rates

Question 29

Which of the following factors can influence the effectiveness of a managed float system?

Accepted Answer

Economic fundamentals, market sentiment, and the credibility of the central bank

Answer

Natural disasters

Answer

Political stability

Question 30

What are the potential macroeconomic consequences of an excessively weak currency under a managed float system?

Accepted Answer

Higher inflation, reduced exports, and a less competitive economy

Answer

Increased economic growth and job creation

Answer

Stable prices and improved competitiveness

Question 31

Which of the following is a potential risk associated with central bank intervention in a managed float system?

Accepted Answer

Moral hazard, where market participants may come to rely excessively on central bank intervention, and market dependency, where the exchange rate becomes overly sensitive to central bank actions

Answer

Reduced exchange rate volatility

Answer

Greater economic stability

Answer

Enhanced economic growth

Question 32

Which of the following is a primary objective of a managed float system?

Accepted Answer

To maintain exchange rates within a specified target range

Answer

To devalue the domestic currency relative to foreign currencies

Answer

To eliminate all fluctuations in exchange rates

Answer

To prevent speculative attacks on the domestic currency

Question 33

Which mechanism is typically used by central banks to intervene in the foreign exchange market under a managed float system?

Accepted Answer

Open market operations (buying or selling government securities)

Answer

Fiscal policy measures (adjusting government spending or taxes)

Answer

Direct intervention in the spot market (buying or selling foreign currency)

Answer

Quantitative easing (expanding the money supply)

Question 34

What is a potential advantage of a managed float system compared to a fixed exchange rate system?

Accepted Answer

It allows for greater flexibility in responding to external economic shocks while maintaining some degree of exchange rate stability.

Answer

It guarantees a stable and predictable exchange rate.

Answer

It eliminates the risk of currency crises.

Answer

It reduces transaction costs for international trade.

Question 35

How does a managed float system differ from a free float system?

Accepted Answer

In a managed float system, central banks intervene in the foreign exchange market to influence exchange rates, while in a free float system, exchange rates are determined solely by market forces.

Answer

Managed floats allow for greater exchange rate volatility than free floats.

Answer

Managed floats are used by developed countries, while free floats are used by developing countries.

Answer

Free floats are more effective in preventing currency crises.

Question 36

What is the role of speculators in a managed float system?

Accepted Answer

Speculators can influence exchange rates by buying or selling large amounts of currency, potentially putting pressure on central banks to intervene.

Answer

Speculators have no impact on the effectiveness of a managed float system.

Answer

Speculators are primarily motivated by a desire to profit from exchange rate fluctuations.

Answer

Speculators are always beneficial to the economy because they provide liquidity to the foreign exchange market.

Question 37

What is the term for the range within which a central bank aims to keep the exchange rate in a managed float system?

Accepted Answer

Target zone

Answer

Float band

Answer

Equilibrium rate

Answer

Intervention band

Question 38

How does a depreciation of the domestic currency typically affect the value of domestically produced goods in foreign markets?

Accepted Answer

It makes domestically produced goods cheaper for foreign buyers.

Answer

It makes domestically produced goods more expensive for foreign buyers.

Answer

It has no significant impact on the value of domestically produced goods in foreign markets.

Question 39

Which of the following is a primary objective of a managed float system?

Accepted Answer

Maintaining exchange rate stability while allowing for some flexibility

Answer

Eliminating all fluctuations in exchange rates

Answer

Depreciating the domestic currency to boost exports

Question 40

What is a key advantage of a managed float system compared to a fixed exchange rate system?

Accepted Answer

Greater ability to adjust to economic shocks without experiencing large exchange rate fluctuations

Answer

Lower levels of inflation

Answer

Reduced government borrowing costs

Answer

Increased foreign direct investment

Question 41

Which of the following factors can influence the effectiveness of a managed float system?

Accepted Answer

Economic fundamentals, market sentiment, and political stability

Answer

Fiscal policy stance only

Answer

Central bank independence only

Question 42

In what circumstances might a country abandon a managed float system?

Accepted Answer

Severe economic crisis or loss of confidence in the domestic currency

Answer

A large current account surplus

Answer

Stable economic growth and low inflation

Question 43

Which of the following is a potential consequence of a misaligned exchange rate under a managed float system?

Accepted Answer

Loss of competitiveness and economic imbalances

Answer

Reduced trade deficit

Answer

Increased foreign investment

Answer

Stable economic growth

Question 44

How does a managed float system differ from a dirty float system?

Accepted Answer

A managed float involves more central bank intervention to maintain exchange rate stability

Answer

A dirty float allows for greater exchange rate volatility without the intervention of central banks

Answer

A dirty float is used exclusively in developing countries

Question 45

What are the key characteristics of a successful managed float system?

Accepted Answer

Exchange rate stability, low inflation, and a flexible economy

Answer

High economic growth, low unemployment, and a balanced budget

Answer

A strong military, a stable political environment, and a large population

Question 46

Which of the following is a primary objective of a managed float system?

Accepted Answer

To maintain exchange rate stability while allowing for some flexibility

Answer

To let the exchange rate fluctuate freely without any intervention

Answer

To fix the exchange rate at a predetermined level

Question 47

What is the main mechanism used by central banks to intervene in a managed float system?

Accepted Answer

Buying and selling foreign currencies

Answer

Adjusting fiscal policy

Answer

Raising and lowering interest rates

Answer

Implementing capital controls

Question 48

What is a potential benefit of a managed float system?

Accepted Answer

Reduced exchange rate volatility

Answer

Guaranteed appreciation of domestic currency

Answer

Elimination of exchange rate risk

Answer

Increased international trade

Question 49

What is the target range within which exchange rates are allowed to fluctuate in a managed float system?

Accepted Answer

Typically between 2-5%

Answer

Less than 1%

Answer

Not predetermined

Answer

More than 10%

Question 50

Which of the following factors can influence the decision of a central bank to intervene in a managed float system?

Accepted Answer

Economic growth, inflation, and political stability

Answer

Stock market performance

Answer

Weather conditions

Question 51

What is the impact of a central bank buying foreign currency in a managed float system?

Accepted Answer

Appreciation of domestic currency

Answer

Depreciation of domestic currency

Answer

Increase in inflation

Answer

No change in exchange rate

Question 52

What is the relationship between a managed float system and capital controls?

Accepted Answer

Capital controls can be used to complement a managed float system

Answer

Managed float systems are incompatible with capital controls

Answer

Capital controls are always necessary in a managed float system