A fixed exchange rate is a rate that is set by a central bank or other monetary authority and does not change. That is it is specified in terms of a specific currency. For example the Canadian dollar has been pegged to the US dollar since 1962 at a rate of 1 CAD = 0.925 USD. This means that if you have 1 CAD you can exchange it for 0.925 USD. Similarly if you have 1 USD you can exchange it for 1.08 CAD.
There are a few reasons why countries might choose to have a fixed exchange rate. First it can help to stabilize the economy by preventing sharp swings in the value of the currency. Second it can help to promote trade and investment by making it easier for businesses to calculate costs. Finally it can give the country more control over its monetary policy.
There are some drawbacks to having a fixed exchange rate however. First it can lead to inflation if the country’s central bank prints too much money. Second it can make the country’s exports more expensive and its imports cheaper which can hurt the economy. Finally it can be difficult to change a fixed exchange rate once it is in place.
What do you think? Are fixed exchange rates a good idea?
What is a fixed exchange rate?
Answer 1: A fixed exchange rate is a type of exchange rate regime where a currency’s value is fixed against the value of another currency or to an index of prices.
What are the benefits of having a fixed exchange rate?
Answer 2: A fixed exchange rate can provide stability and predictability for businesses and consumers and can help to reduce inflationary pressures.
What are the drawbacks of having a fixed exchange rate?
Answer 3: A fixed exchange rate can lead to rigidity in the economy and can also create problems if the value of the pegged currency begins to diverge from the underlying value of the peg.
What is an example of a country with a fixed exchange rate?
Answer 4: China has a fixed exchange rate regime with its currency the Renminbi pegged to a basket of currencies.
How does a fixed exchange rate differ from a floating exchange rate?
Answer 5: A floating exchange rate is one where the value of a currency is allowed to fluctuate according to market forces while a fixed exchange rate is one where the value of a currency is pegged to another currency or an index.
What is a pegged exchange rate?
Answer 6: A pegged exchange rate is a type of fixed exchange rate regime where a currency’s value is pegged to the value of another currency.
What is an example of a country with a pegged exchange rate?
Answer 7: The Hong Kong dollar is pegged to the US dollar.
What is a managed exchange rate?
Answer 8: A managed exchange rate is a type of exchange rate regime where a currency’s value is managed by a central bank or other authority in order to maintain a desired level.
What is an example of a country with a managed exchange rate?
Answer 9: Singapore has a managed exchange rate regime with its currency the Singapore dollar pegged to a basket of currencies.
What is a crawling peg exchange rate?
Answer 10: A crawling peg exchange rate is a type of managed exchange rate regime where a currency’s value is allowed to fluctuate within a predetermined band against a basket of currencies.
What is an example of a country with a crawling peg exchange rate?
Answer 11: The Saudi Arabian Riyal has a crawling peg exchange rate regime with its value pegged to a basket of currencies.
What is a devalued exchange rate?
Answer 12: A devalued exchange rate is one where the value of a currency has been deliberately lowered in order to make exports more competitive.
What is an example of a country with a devalued exchange rate?
Answer 13: Venezuela has a devalued exchange rate regime with its currency the Bolivar pegged to the US dollar.
What is a revalued exchange rate?
Answer 14: A revalued exchange rate is one where the value of a currency has been deliberately raised in order to make imports more expensive.
What is an example of a country with a revalued exchange rate?
Answer 15: China has a revalued exchange rate regime with its currency the Renminbi pegged to a basket of currencies.
