Assume that there is a fixed exchange rate is overvalued, what can the central bank due to defend the currency?
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Alternative (2) is correct. Under a fixed exchange rate system the exchange rate is fixed by the monetary authority and it strives to maintain the rate by sale and purchase of own currency/foreign currency.
On the other hand, under a managed floating exchange rate the exchange rate is allowed to fluctuate freely on the basis of the market forces of demand and supply but the government might intervene in order to avoid frequent and extreme fluctuations.
Alternative (2) is correct. Under a fixed exchange rate system the exchange rate is fixed by the monetary authority and it strives to maintain the rate by sale and purchase of own currency/foreign currency.
On the other hand, under a managed floating exchange rate the exchange rate is allowed to fluctuate freely on the basis of the market forces of demand and supply but the government might intervene in order to avoid frequent and extreme fluctuations.
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