ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Dirty, or managed floats are used when a country establishes a currency band or currency board. The goal of a dirty float is to keep currency volatility low and promote economic stability.

Detailed explanation-2: -A managed floating exchange rate is an exchange rate system that allows a nation’s central bank to intervene regularly in foreign exchange markets to change the direction of the currency’s float and/or reduce the amount of currency volatility. This exchange rate system is also known as a “dirty float”.

Detailed explanation-3: -When market value of domestic currency highly depreciates against value of US dollar, The central bank sells foreign currency in international market to restore the value of domestic currency.

Detailed explanation-4: -In floating exchange rate systems, central banks buy or sell their local currencies to adjust the exchange rate. This can be aimed at stabilizing a volatile market or achieving a major change in the rate.

Detailed explanation-5: -In a managed floating system, foreign exchange rate is determined by market forces. However, the central bank needs to intervene in this system in order to restrict the fluctuations in the exchange rate within certain limits. The aim is to keep exchange rate close to desired target values.