Question : Which of the following is an example of a managed exchange rate system?
Option 1: Currency pegging
Option 2: Currency hedging
Option 3: Currency speculation
Option 4: Currency arbitrage
Correct Answer: Currency pegging
Solution : The correct answer is (a) Currency pegging.
Currency pegging is an example of a managed exchange rate system. In a currency peg, a country's central bank or monetary authority fixes the value of its currency to another currency, such as the US dollar or a basket of currencies. The fixed exchange rate is maintained through the active intervention of the central bank in the foreign exchange market. The central bank buys or sells its own currency to ensure that its value remains in line with the pegged exchange rate.
Currency pegging is typically done to achieve exchange rate stability and to provide certainty in international trade and investment. It can help reduce exchange rate volatility and facilitate economic planning. However, maintaining a currency peg requires continuous intervention by the central bank, and it may limit the flexibility of the country's monetary policy.