In a completely flexible exchange rate system, the central bank:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → does not intervene in the foreign exchange market
In a completely flexible system, the exchange rate is left wholly to market demand and supply. The central bank does not step in at all.
Buying and selling to moderate the rate is managed floating. Fixing the rate and adjusting it rarely is a fixed rate.
NCERT (2026-27): “Flexible Exchange Rate This exchange rate is determined by the market forces of demand and supply. It is also known as Floating Exchange Rate. As depicted in Fig. 6.1, the exchange rate is determined where the demand curve intersects with the supply curve, i.e., at point e on the Y – axis. Point q on the x – axis determines the quantity of US Dollars that have been demanded and supplied on e exchange rate. In a completely flexible system, the Central banks do not intervene in the foreign exchange market.” Glossary: “Flexible/floating exchange rate – An exchange rate determined by the forces of demand and supply in the foreign exchange market without central bank intervention.” |