How can a government manipulate floating exchange rate?

A government can manipulate floating rate by controlling the interest rate. To increase the exchange rate, ie the value of the currency, the government can increase its interest rate, which attracts foreign investors to save money in the country. To do so, the investors have to buy the country's currency, which increases the demand for the currency. As the demand curve of the currency shifts outwards, the price (the exchange rate) of the currency increases, hence a higher exchange rate. Vice versa for a lower exchange rate. 

Answered by Matthew L. Economics tutor

2254 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

Explain why a firm in perfect competition can not experience abnormal profit in the long run.


Distinguish between direct and indirect tax.


What are the ways to combat high inflation?


If monopolies are so inefficient, why do they still exist?


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo
Cookie Preferences