Fixed Exchange Rate

A fixed exchange rate is a type of exchange rate system in which the value of one currency is fixed in relation to another currency, or a basket of currencies, by the intervention of the central bank. This means that the exchange rate between the two currencies will not fluctuate freely, but will instead be set by the central bank.

Key features of fixed exchange rate:

• The exchange rate is fixed by the central bank.
• The value of one currency is pegged to the value of another currency or a basket of currencies.
• The exchange rate does not fluctuate freely.
• The central bank controls the exchange rate by manipulating the supply of the pegged currency.

Examples of fixed exchange rate:

• The Swiss franc is pegged to the US dollar at a rate of 1:1.
• The Canadian dollar is pegged to the US dollar at a rate of 1:1.

Advantages:

• Maintaining price stability.
• Keeping inflation low.
• Reducing uncertainty.

Disadvantages:

• Lack of flexibility.
• Limited ability to respond to economic shocks.
• Maintaining a fixed exchange rate can be difficult, and can often lead to economic instability.

Overall, fixed exchange rate systems are used when a country wants to maintain price stability and control inflation.