Th4.1: ^^ Free Floating System

Question 1

What is a free floating system?

Answer 1

where the value of the currency is determined purely by market demand and supply of the currency, with no target set by the government and no official intervention in the currency markets

Question 2

What two things affect the exchange rate under a floating system?

Answer 2

trade flows and capital flows

Question 3

True or false: most systems are floating?

Answer 3

True - including the UK

Question 4

What does the use of floating exchange rates mean for the central bank?

Answer 4

they do not need to try to maintain a particular exchange rate and therefore will not need to use reserves to buy pounds in the market to keep it at the target

Question 5

What are interest rates reserved for?

Answer 5

domestic monetary policy to control inflation rather than maintaining the exchange rate

Question 6

What is it partly able to auto-correct?

Answer 6

a trade deficit as a large trade deficit will cause a fall in the value of the pound, since supply of pounds is high and demand is low - this fall in the pound will reduce the trade deficit

Question 7

How does it reduce the risk of currency speculation?

Answer 7

since speculation is most attractive when the currency is over or undervalued and floating exchange rates reduces this because the price is determined by the market