In a pegged floating exchange rate system, which institution is most likely to intervene to prevent extreme fluctuations?

In a pegged floating exchange rate system, which institution is most likely to intervene to prevent extreme fluctuations?

• A. The central bank.
• B. The stock exchange.
• C. The international monetary fund.
• D. The chamber of commerce.

Answer: (A)

Intervention in a pegged floating system comes from the monetary authority that controls the currency—usually the central bank. When the exchange rate threatens to break the peg or swings too far, the central bank uses its tools to stabilize it: it can buy or sell its own currency in the foreign exchange market, deploy foreign exchange reserves, adjust interest rates to influence capital flows and demand for the currency, or implement temporary measures to support the peg. This direct mandate to maintain currency stability is why the central bank is the most likely to intervene. The stock exchange handles trading of stocks and is not involved in setting or defending exchange rates. The international monetary fund can provide financial support and policy guidance, but it does not typically intervene directly in daily currency markets. The chamber of commerce is a business association with no role in monetary policy or exchange-rate management.

Intervention in a pegged floating system comes from the monetary authority that controls the currency—usually the central bank. When the exchange rate threatens to break the peg or swings too far, the central bank uses its tools to stabilize it: it can buy or sell its own currency in the foreign exchange market, deploy foreign exchange reserves, adjust interest rates to influence capital flows and demand for the currency, or implement temporary measures to support the peg. This direct mandate to maintain currency stability is why the central bank is the most likely to intervene.

The stock exchange handles trading of stocks and is not involved in setting or defending exchange rates. The international monetary fund can provide financial support and policy guidance, but it does not typically intervene directly in daily currency markets. The chamber of commerce is a business association with no role in monetary policy or exchange-rate management.