Question : What is the term used to describe the practice of pegging a currency to a more stable foreign currency?
Option 1: Fixed exchange rate
Option 2: Flexible exchange rate
Option 3: Managed float exchange rate
Option 4: Currency board arrangement
Correct Answer:
Fixed exchange rate
Solution : The correct answer is a) Fixed exchange rate
The term used to describe the practice of pegging a currency to a more stable foreign currency is a fixed exchange rate. In a fixed exchange rate system, a country's currency is set at a specific value relative to another currency, usually a major reserve currency such as the US dollar or the euro. The central bank of the country actively intervenes in the foreign exchange market to maintain the fixed exchange rate by buying or selling its own currency as needed. This policy is aimed at providing stability and predictability in international trade and investment by reducing exchange rate fluctuations. However, it requires careful management by the central bank to maintain the pegged exchange rate and may limit the flexibility of monetary policy in response to domestic economic conditions.
