"The central bank needs to intervene under the managed floating system." Do you agree with the given statement ? Support your answer with valid reasons. Differentiate between Surplus in Balance of Trade and Current Account Surplus.

Question

Accepted Answer

Yes, I agree that the central bank needs to intervene under the managed floating system. The managed floating system is a hybrid approach where exchange rates are primarily determined by market forces, but the central bank intervenes to control excessive fluctuations and keep the rate within a desired target range. This is necessary because:

1. To prevent undue volatility that could harm foreign trade and investment
2. To maintain orderly market conditions
3. To build confidence in the currency

**Difference between Surplus in Balance of Trade and Balance of Payments:**
- **Balance of Trade** covers only visible items (goods) — exports and imports of merchandise. A surplus means exports of goods exceed imports of goods.
- **Balance of Payments** includes all transactions — visible items, invisible items (services), capital transfers, and financial transfers. A surplus means total receipts from rest of the world exceed total payments to rest of the world.