Question : Which of the following is an example of a freely floating exchange rate system?

Option 1: Gold standard
 

Option 2: Currency board arrangement
 

Option 3: Managed float exchange rate

 

Option 4: Pegged exchange rate

Correct Answer: Managed float exchange rate

Solution : The correct answer is c) Managed float exchange rate

A managed float exchange rate system is an example of a freely floating exchange rate system. In a managed float system, the exchange rate is determined by market forces of supply and demand, similar to a fully floating exchange rate system. However, the central bank or monetary authority also intervenes in the foreign exchange market to influence or manage the exchange rate.

In a managed float system, the central bank may intervene to prevent excessive volatility, smooth out abrupt currency movements, or achieve certain policy objectives. The central bank can buy or sell its own currency to influence the exchange rate. However, the degree of intervention and the specific policies can vary among countries.

On the other hand, the gold standard, currency board arrangement, and pegged exchange rate systems are not freely floating exchange rate systems. The gold standard fixes the value of a currency to a specific amount of gold, the currency board arrangement fixes the value of a currency to another currency, and the pegged exchange rate system fixes the value of a currency within a specific range or against a specific currency. These systems involve predetermined or fixed exchange rates and do not allow for free fluctuations based on market forces.