Question : What term is used to describe the situation when a country's currency value is fixed to another currency or a basket of currencies?
Option 1: Floating exchange rate.
Option 2: Managed float system.
Option 3: Fixed exchange rate.
Option 4: Pegged exchange rate.
Correct Answer: Fixed exchange rate.
Solution : The correct answer is c) Fixed exchange rate.
The term used to describe the situation when a country's currency value is fixed to another currency or a basket of currencies is "Fixed exchange rate." Option (c) is the correct answer.
In a fixed exchange rate system, the value of a country's currency is set and maintained at a specific exchange rate relative to another currency or a group of currencies. This fixed rate is usually determined and managed by the country's central bank or monetary authority.
Under a fixed exchange rate regime, the central bank intervenes in the foreign exchange market to buy or sell its own currency in order to maintain the exchange rate within the predetermined range. The central bank may use its foreign exchange reserves to ensure the stability of the fixed rate.
Fixed exchange rate systems can provide stability and predictability for international trade and investment, as the exchange rate remains relatively constant. However, maintaining a fixed exchange rate requires continuous monitoring and intervention by the central bank, and it may limit a country's ability to independently adjust its exchange rate based on its economic conditions.
