IB International Economics Higher Level (HL) Practice Exam

A managed exchange rate is characterized by the ability of a country's government or central bank to intervene in the currency market to stabilize or influence the value of its currency. This intervention can occur under specific conditions, such as when the currency value fluctuates too widely or when economic fundamentals indicate that the currency is overvalued or undervalued. By intervening, authorities can buy or sell their currency to maintain a desired exchange rate range, providing a level of predictability and stability for international trade and investment.

In contrast, a completely floating exchange rate system involves no government intervention, which is not compatible with the concept of a managed exchange rate. Similarly, claiming that it is "always set at a fixed value" contradicts the nature of a managed system, where the exchange rate can fluctuate within a prescribed range. Therefore, the statement about authorities being able to intervene under certain conditions accurately reflects the fundamental aspects of a managed exchange rate.