Question : When a country's currency is pegged to another currency or a basket of currencies, it is said to have a ________ exchange rate system.
Option 1: fixed
Option 2: floating
Option 3: managed
Option 4: flexible
Correct Answer:
fixed
Solution : The correct answer is (a) fixed.
When a country's currency is pegged to another currency or a basket of currencies, it means that the exchange rate is fixed and maintained at a specific level. The central bank or monetary authority of the country intervenes in the foreign exchange market to ensure that the exchange rate remains constant and does not fluctuate freely based on market forces of supply and demand. In a fixed exchange rate system, the central bank buys and sells its currency in the foreign exchange market to maintain the pegged exchange rate. This system provides stability in currency values and helps facilitate international trade and investment.
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