In which one of the following exchange rate systems, 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?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Managed Floating Exchange Rate
Under a flexible rate the market alone sets the exchange rate; under a fixed rate the central bank must hold it at one level all the time. The managed floating system, also called dirty floating, lies between the two: the market sets the rate, but central banks buy and sell foreign currencies to moderate exchange rate movements whenever they feel it is appropriate.
The world moved to this system without any formal international agreement.
Why the other options are incorrect
Option (1) Fixed Exchange Rate — Incorrect. Under a fixed rate the government fixes the rate at a particular level and the central bank must intervene all the time to keep it there, not only when it thinks fit.
Option (3) Flexible Exchange Rate — Incorrect. Under a flexible rate the market forces of demand and supply alone set the rate and the central bank does not intervene at all.
Option (4) Devaluation — Incorrect. Devaluation is a single act, the government raising the price of foreign currency under a fixed rate, so it is a change in a fixed rate, not an exchange rate system.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 13-05 S1 | 21-05 S1* 22-05 S2* 29-05 S2* | – | 29-05 S1* 12-06 S2* | – |
* A similar question.
NCERT (2025-26): “6.2.4 Managed Floating … 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…” |