Identify the exchange rate system in which central bank of a country intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate.

Dirty floating.

The correct answer is Option (2) → Dirty floating.

In a dirty floating exchange rate system (also called a managed floating system), the value of a country’s currency is primarily determined by market forces (demand and supply of foreign exchange), but the central bank occasionally intervenes to stabilize or influence the exchange rate. Such intervention may involve buying or selling foreign currency whenever the central bank feels that the currency is appreciating or depreciating too sharply.