Economics Aggregate Demand And Supply Questions
There are three main types of exchange rate regimes:
1. Fixed exchange rate regime: Under this regime, the value of a country's currency is fixed or pegged to another currency, a basket of currencies, or a commodity such as gold. The central bank intervenes in the foreign exchange market to maintain the fixed exchange rate by buying or selling its own currency.
2. Floating exchange rate regime: In this regime, the value of a country's currency is determined by market forces of supply and demand. The exchange rate fluctuates freely based on various economic factors such as interest rates, inflation, and capital flows. The central bank may intervene occasionally to stabilize the exchange rate or manage excessive volatility.
3. Managed or dirty float exchange rate regime: This regime is a combination of fixed and floating exchange rate systems. The central bank allows the exchange rate to float within a certain range or band, but intervenes in the foreign exchange market to prevent significant deviations from the desired exchange rate level. This intervention can involve buying or selling currencies to influence the exchange rate.