Finschool By 5paisa

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Exchange Rate

Exchange rate

A series of operations called an exchange rate mechanism (ERM) is used to control how much one currency will exchange for another. It is used by central banks as an element of the monetary policy of an economy.

If a nation uses either a fixed exchange rate or one with a limited floating exchange rate that is bounded around its peg, such a technique can be used (known as an adjustable peg or crawling peg).

The process of formulating, announcing, and carrying out a plan of action by the central bank, currency board, or other appropriate monetary authority of a nation that regulates the amount of money in an economy and the channels by which new money is provided is known as monetary policy. A monetary authority that determines the value of a country’s currency is granted control over the exchange rate and money supply under a currency board. This monetary authority frequently receives explicit instructions to back all in-use domestic currency with foreign cash.

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