GENERAL KNOWLEDGE

Detailed explanation-1: -For a floating exchange rate, central banks are not required to keep large foreign currency reserve amounts for defending the exchange rate.

Detailed explanation-2: -A floating exchange rate is one that is determined by supply and demand on the open market. A floating exchange rate doesn’t mean countries don’t try to intervene and manipulate their currency’s price, since governments and central banks regularly attempt to keep their currency price favorable for international trade.

Detailed explanation-3: -In contrast to the fixed exchange rate world, monetary policy can change the level of income with floating exchange rates. Since the exchange rate adjusts to yield balance of payments equilibrium, the central bank can choose its monetary policy independent of other countries’ policies.