Question

Discuss briefly the meaning of Fixed Exchange Rate.

Explain fixed rate of exchange.

Answer 1

A fixed exchange rate (also termed the pegged exchange rate) is the exchange rate that is determined in a fixed exchange rate system. In this system, the exchange rate is maintained at a constant or fixed level by the country’s monetary authority. Under this regime, the monetary authority of the country pegs (or fixes) the value of its currency against various other currencies.

This system of exchange rates avoids frequent fluctuations in the exchange rate and makes international trade more predictable. In other words, it ensures guaranteed returns to the exporters.

A fixed exchange rate regime has the following two variants.

1. The Gold Standard System of exchange rate
2. The Bretton Woods System of exchange rates