Cambridge International as and a level Economics Ebook

A managed float
A 
managed fl oat
, in eff ect, combines features of a 
fl oating exchange rate system and a fi xed exchange rate 
system. It usually involves a government allowing the 
exchange rate to be determined by market forces within 
a given band, which has upper and lower limits. 
Figure
 
4.15 
shows that the government sets a central value of 
P
, 
an upper band of 
P
a
, which it does not want the exchange 
rate to exceed, and a lower limit of 
P
b
, which it does not 
want it to fall below.
If the exchange rate is within the limits, for 
example at 
P
c
, no action will be taken. If, however, 
demand for the currency were to rise to 
D
1
, the central 
bank would sell the domestic currency to increase 
supply to 
S
1
and so keep the exchange rate within the 
desired band.
Managed float: 
where the exchange rate is influenced by 
state intervention.
KEY TERM
The factors underlying changes in foreign 
exchange rates
Changes in the demand for and supply of a currency will 
cause a change in the price of the currency in the case of a 
fl oating exchange rate and will put upward or downward 
pressure on a fi xed exchange rate.
Demand for the currency will rise if a higher value 
of exports is being sold. Foreigners may buy more of the 
currency if they wish to purchase shares in the country’s 
Figure 4.14 
Maintaining the value of the UAE dirham
0.25
0
D
D
S
S
1
S
Q
1
Q
D
1
D
1
S
1
Price of UAE Dirham in $s
Figure 4.15 
A managed float
0
Quantity of currency
Central value
S
S
1
S
P
a
P
c
P
P
b
Q
D
1
D
1
S
1
Price of currency
D
D