Question : Which of the following exchange rate systems is a combination of fixed and floating exchange rates, where the central bank occasionally intervenes in the foreign exchange market?
Option 1: Managed float exchange rate
Option 2: Pegged exchange rate
Option 3: Currency board arrangement
Option 4: Crawling peg exchange rate
Correct Answer:
Managed float exchange rate
Solution : The correct answer is (a) Managed float exchange rate.
In a managed float exchange rate system, also known as a dirty float or a managed flexible exchange rate, the exchange rate is determined by market forces of supply and demand, but the central bank occasionally intervenes in the foreign exchange market to influence the exchange rate. The central bank may intervene by buying or selling its own currency to stabilize or manage the exchange rate within a certain range. This allows for some flexibility in the exchange rate, but with occasional central bank interventions to prevent excessive volatility or to achieve specific policy objectives.
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