Fixed Exchange Rate
A fixed exchange rate is a system where a country's currency value is tied or pegged to another major currency, such as the US dollar or gold. This means the government or central bank actively maintains the exchange rate at a specific level, rather than letting it fluctuate based on market forces. This stability can help promote trade and investment, as businesses know what to expect for currency values. However, it requires significant reserves and can lead to economic challenges if the fixed rate does not reflect the market's conditions.
Additional Insights
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A fixed exchange rate is a system where a country's currency value is tied or pegged to another major currency, like the US dollar or gold. This means the government or central bank will intervene in the foreign exchange market to maintain the currency's value within a specific range. The goal is to provide stability in international trade and investment by reducing exchange rate fluctuations. While it can create confidence in a country’s economy, it can limit monetary policy flexibility and lead to challenges if the fixed rate does not reflect market conditions.