What kind of currency arrangement allows government intervention to a larger extent in currency fluctuations?

The managed floating currency arrangement allows for significant government intervention in response to currency fluctuations. In this system, a country's central bank can actively engage in the foreign exchange market to stabilize or influence its currency's value within a defined range or against other currencies. Unlike a free floating arrangement, where the currency value is determined solely by market forces, a managed floating system gives governments or central banks the discretion to intervene when necessary to mitigate volatility or achieve other economic objectives.

This type of currency arrangement recognizes the importance of both market dynamics and the central bank's role in maintaining economic stability. For example, if a country's currency begins to lose value too quickly, the central bank may step in with foreign exchange reserves to buy its own currency, thereby supporting its value. This flexibility helps manage trade balances, inflation rates, and economic confidence, making it an effective tool for countries facing challenges in currency markets.

In contrast, a conventional peg entails fixing the currency value to another currency or a basket of currencies, with less room for intervention outside of maintaining that fixed rate. Lastly, the concept of a free floating currency relies entirely on market forces for valuation without significant government intervention, which is contrary to the mechanism of managed floating systems. The choice of managed floating acknowledges the balance between market forces