Question

In a managed floating exchange rate system:

• A. Exchange rates are fully market determined
• B. Gold determines exchange rates
• C. Government or central bank intervenes when required
• D. Exchange rates remain permanently fixed

Hint:

Think of it like a kite: it flies freely in the wind (market forces), but the central bank holds the string and pulls it back if it drifts too far in any direction!

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
There are three main types of exchange rate systems: Fixed, Flexible (Floating), and Managed Floating.
Step 2: Detailed Explanation:
In a Flexible system, the rate is determined purely by market forces (demand and supply) without any government intervention.
In a Fixed system, the government sets and maintains the rate at a specific level.
In a Managed Floating system (also known as "Dirty Floating"), the exchange rate is primarily determined by market forces, but the Central Bank (like RBI) intervenes by buying or selling foreign currency to stabilize the domestic currency during periods of extreme volatility.
Step 3: Final Answer:
The defining characteristic of managed floating is occasional intervention by the central bank to prevent excessive fluctuations.