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. 

ML
Answered by Matthew L. Economics tutor

3000 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

Distinguish between the concepts of income elasticity of demand (YED) and cross price elasticity of demand (XED)


Evaluate the effectiveness of monetary policy to increase AD during a recession


Describe a negative externality of consumption and explain a method the government can impose to reduce it. Give examples.


What are the characteristics of a perfectly competitive market structure?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2026 by IXL Learning