Economics

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Currency Intervention (Chain of Analysis)

Level:: AS, A Level, IB

Board:: AQA, Edexcel, OCR, IB, Eduqas, WJEC

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Here is a short revision video exploring a chain of reasoning to this question: Explain two ways in which a central bank can cause a currency depreciation.

Chains of Reasoning: Currency Intervention

Key Notes

Attempts by a central bank to cause a currency depreciation happens in a managed floating exchange rate system. A depreciation is a drop in the external value.
One policy is to cut interest rates. This is designed to cause an outflow of hot money from the banking system and an increase in currency flowing overseas seeking a better return.
Another intervention would be for the Central Bank to go directly into the foreign exchange market and sell your country’s own currency and buy foreign currencies.
This again leads to an increased market supply of the domestic currency and a fall in the exchange rate. One effect would be a rise in foreign currency reserves.

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