Floating or flexible exchange rate is determined by the market forces of demand and supply. In a completely floating exchange rate system, the Central Bank do not interfere in the foreign exchange market. Demand for a foreign currency increases in cases of increased imports or international travels or higher investments in securities of other countries. This increase the exchange rate and depreciates the domestic currency. Depreciation has a positive price impact on exports which increases and negative impact on imports which decreases.

If a Central Bank of a country buys and sells foreign currencies to moderate exchange rate movements under a flexible exchange rate system then this informal arrangement is called.

Managed floating exchange rate system

The correct answer is Managed floating exchange rate system.

Without any formal international agreement, the world has moved on to what can be best described as a managed floating exchange rate system. It is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). Under this system, also called dirty floating, central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate. Official reserve transactions are, therefore, not equal to zero