Question : What is the term used to describe the exchange rate regime where a currency's value is fixed to another currency or a basket of currencies?
Option 1: Floating exchange rate
Option 2: Managed float exchange rate
Option 3: Pegged exchange rate
Option 4: Currency board arrangement
Correct Answer: Pegged exchange rate
Solution : The correct answer is c) Pegged exchange rate
The term used to describe the exchange rate regime where a currency's value is fixed to another currency or a basket of currencies is a pegged exchange rate. In a pegged exchange rate system, the value of a country's currency is set and maintained at a specific rate in relation to the chosen reference currency or currencies.
Under a pegged exchange rate regime, the central bank or monetary authority of a country intervenes in the foreign exchange market to buy or sell its currency to maintain the fixed exchange rate. This intervention involves adjusting the supply and demand for the currency to ensure its value remains aligned with the reference currency or currencies.
Pegged exchange rate regimes can take various forms, such as a fixed peg to a single currency, a crawling peg where the exchange rate is adjusted periodically, or a basket peg where the currency is fixed to a basket of currencies.
