Question : Which of the following exchange rate systems allows for fluctuations in currency values but with some intervention by the central bank?
Option 1: Floating exchange rate
Option 2: Fixed exchange rate
Option 3: Pegged exchange rate
Option 4: Managed float exchange rate
Correct Answer: Managed float exchange rate
Solution : The correct answer is d) Managed float exchange rate
In a managed float exchange rate system, the currency's value is determined by market forces of supply and demand, allowing for fluctuations in currency values. However, the central bank intervenes in the foreign exchange market to influence or manage the exchange rate. The central bank may buy or sell its own currency to stabilize or influence its value in response to economic factors or policy objectives.
In a managed float exchange rate system, the central bank maintains a degree of flexibility in allowing the currency to fluctuate but also intervenes to prevent excessive volatility or to achieve certain economic goals, such as maintaining price stability or supporting export competitiveness.
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