Question : In the context of exchange rates, what does the term "pegged" mean?
Option 1: The exchange rate is determined by market forces.
Option 2: The exchange rate is fixed by the central bank.
Option 3: The exchange rate fluctuates freely.
Option 4: The exchange rate is determined by interest rate differentials.
Correct Answer:
The exchange rate is fixed by the central bank.
Solution : The correct answer is b) The exchange rate is fixed by the central bank.
The term "pegged" refers to: The exchange rate is fixed by the central bank.
When a currency is pegged, its value is set and maintained at a specific level relative to another currency or a basket of currencies. The central bank of the country intervenes in the foreign exchange market to ensure that the exchange rate remains fixed within a certain range or at a specific rate.
This is in contrast to a floating exchange rate system where the exchange rate is determined by market forces of supply and demand. In a pegged exchange rate system, the central bank actively manages and controls the value of its currency to maintain stability and control fluctuations.
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