Question:
In a managed floating exchange rate system:
In a managed floating exchange rate system:
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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!
Updated On: May 14, 2026
- Exchange rates are fully market determined
- Gold determines exchange rates
- Government or central bank intervenes when required
- Exchange rates remain permanently fixed
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The Correct Option is C
Solution and Explanation
Step 1: Understanding the Concept:
A managed floating exchange rate system (also known as "dirty floating") is a hybrid between a fixed and a flexible exchange rate system.
Step 2: Detailed Explanation:
• Flexible (Floating) Part: Under normal conditions, the value of the currency is determined by the forces of demand and supply in the foreign exchange market.
• Managed Part: The Central Bank (like the RBI) intervenes by buying or selling foreign currency to prevent excessive fluctuations or to keep the exchange rate within a desired "target zone."
Step 3: Final Answer:
The central bank intervenes when required to stabilize the currency.
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