Which of the following best describes the policy of central banks around the wor

Question

Which of the following best describes the policy of central banks around the world regarding their countries' exchange rates? Oa. No central bank in the world attempts to influence the exchange rate of its domestic currency. O b. Many, but not all, central banks try to hold their exchange rates at or close to a chosen target value. O d. All central banks maintain a strict exchange rate target. O e.Central banks can control exchange rates, but only if they are willing to tolerate high and variable inflation rate.

Explanation / Answer

The right answer is option b.

Explanation: Central banks can influence the exchange rate by conducting open market operations i.e. buying and selling foreign currency in the market. However, not all central banks do it. The central banks in countries with fixed exchange rate policy do this. The central banks of countries following a free or floating exchange rate policy do not interfere with the exchange rate and they let the demand and supply of currency determine the exchange rate.

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