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.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Dirty floating.
Under dirty floating, also called managed floating, the market sets the exchange rate. Central banks buy and sell foreign currencies to moderate its movements whenever they feel it is appropriate.
It is a mixture of a flexible rate (the float part) and a fixed rate (the managed part).
Option (1) Moderate floating. — Incorrect. There is no such term.
Option (2) Dirty floating. — Correct. The market sets the rate, and central banks step in only when they feel it is appropriate.
Option (3) Flexible exchange rate. — Incorrect. The rate is set by the market forces of demand and supply. The central bank does not intervene.
Option (4) Fixed exchange rate. — Incorrect. The government fixes the rate at one level, and the central bank must intervene whenever the market moves away from that level. It cannot choose to stay out.
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 (2026-27): “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 whenever they feel that such actions are appropriate.…” |