Question : Identify which of the following statements is true?
Option 1: The flexible exchange rate system gives the government more flexibility to maintain large stocks of foreign exchange reserves
Option 2: In the Managed floating exchange rate system, the government intervenes to buy and sell foreign currencies.
Option 3: In the Managed floating exchange system, the central bank intervenes to moderate exchange rate fluctuations
Option 4: In the Fixed exchange rate system, market forces fix the exchange rate.
Correct Answer: In the Managed floating exchange system, the central bank intervenes to moderate exchange rate fluctuations
Solution : The correct answer is (c) In the Managed floating exchange system, the central bank intervenes to moderate exchange rate fluctuations
In a managed floating exchange rate system, the exchange rate is allowed to fluctuate based on market forces, but the central bank intervenes in the foreign exchange market to moderate extreme fluctuations and maintain stability. The central bank may buy or sell foreign currencies to influence the exchange rate and prevent excessive volatility.
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