Question

How is fixed rate of exchange determined.

Explain how fixed rate of exchange is determined.

Answer 1

Fixed rate of exchange is fixed by the component authority i.e. Govt.

Answer 2

The fixed exchange rate is set by the government, which has the sole authority to alter it. Before 1930, during the time when the Gold Standard was widely used, the exchange rate was based on the amount of gold in a country’s currency. For example, the U.S. dollar and the British pound. If the U.S. government set one dollar equal to 1 gram of gold and the British government set one pound equal to 4 grams of gold, then the exchange rate would be 1 pound = 4 dollars, and 1 dollar = 1/4 pound.

After the International Monetary Fund (IMF) was established in 1944, countries that became members were required to declare the value of their currencies in terms of gold. As a result, the exchange rates of different currencies were based on the gold value assigned to each unit of currency by the respective governments. If a government decided to change the amount of gold backing its currency, the exchange rate would also change accordingly. Therefore, under this system, the fixed exchange rate was determined by the gold value set by each government, which was decided after considering the country’s balance of payments position.