Question9 A managed float (dirty float) exchange rate regime is best described as: A primarily market-determined exchange rate where the central bank intervenes occasionally to smooth excessive volatility A freely floating exchange rate with absolutely no central bank participation under any market conditions A permanently fixed exchange rate maintained through unlimited central bank intervention and strict capital controls A currency union arrangement where multiple countries adopt the same currency and surrender independent monetary policy ResetMaximum marks: 1 Flag question undefined

Question

BlackTom AI · Accepted Answer

A managed float (dirty float) is a monetary regime in which the exchange rate is mainly determined by market forces while the central bank steps in occasionally to smooth excessive volatility or correct misalignments.

1. Relevant knowledge points and concepts
- Exchange-rate regimes range from free float (market sets rate) to fixed peg (central bank defends a specific rate) and currency unions (single currency across countries).
- "Clean float" = no intervention; "managed/dirty float" = market determination plus occasional intervention.
- Central-bank objectives: reduce excessive short-term volatility, prevent disorderly markets, or guide competitive position without committing to a fixed parity.

2. Step-by-step reasoning
- Determine whether the regime is market-determined or centrally controlled: managed float is primarily market-driven.
- Determine level of central-bank participation: it intervenes, but not permanently or with unlimited resources.
- Compare definitions: if intervention is occasional smoothing, this matches managed/dirty float.

3. Calculations
- No numerical calculations apply for definitions.

4. Why the correct answer is correct
- Option A states: "A primarily market-determined exchange rate where the central bank intervenes occasionally to smooth excessive volatility." This exactly matches the textbook definition of a managed (dirty) float: exchange rate floats but is managed intermittently to address volatility or misalignment.

5. Why other options are incorrect
- Option B (freely floating with absolutely no central-bank participation) describes a clean float, not a managed float.
- Option C (permanently fixed rate with unlimited intervention and strict capital controls) describes a hard peg or fixed-exchange-rate regime, not a managed float.
- Option D (currency union) describes adoption of a common currency (e.g., euro), which is a different arrangement altogether.

6. Conclusion
The correct choice is option A: "A primarily market-determined exchange rate where the central bank intervenes occasionally to smooth excessive volatility," which matches the provided answer.

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