Question

A system in which the central bank allows the exchange rate to be determined by market forces but intervene at times to influence the rate.

• A. Managed Floating
• B. Devaluation
• C. Flexible Exchange Rate
• D. Official Reserve Transactions

Hint:

Pure Floating: Zero central bank intervention.
Fixed Peg: Active central bank intervention to maintain an exact peg.
Managed Floating: Market-determined baseline with occasional central bank interventions to curb extreme volatility.

Answer 1

The Correct Option is A

Concept:
Exchange rate regimes span a spectrum between completely fixed exchange rates and pure floating exchange rates.
Modern economies frequently adopt hybrid arrangements that balance market efficiency with monetary stability.

Step 1: Understanding Managed Floating:
A managed floating exchange rate system, colloquially referred to as a "dirty float," is a system where the exchange rate is primarily determined by market forces of demand and supply.
However, the monetary authority or central bank intervenes periodically by buying or selling foreign currencies to moderate excessive exchange rate volatility and stabilize the domestic currency.
The central bank does not peg the exchange rate to a specific parity target, but acts to smooth out erratic fluctuations and prevent speculative bubbles.

Step 2: Evaluation of Incorrect Options:
Devaluation refers to an official downward adjustment in the value of a domestic currency under a strictly fixed exchange rate system, which is determined administratively.
A pure flexible exchange rate system operates entirely without central bank intervention, letting market demand and supply determine the clearing price.
Official reserve transactions represent the actual balance-of-payments accounting entries showing purchases or sales of foreign assets, not the overarching institutional policy regime itself.
Final Answer:
Therefore, the described system where market forces dominate but central banks intervene periodically is Managed Floating.