Question : Which of the following exchange rate systems provides the highest level of exchange rate stability?
Option 1: Floating exchange rate
Option 2: Fixed exchange rate ‘
Option 3: Managed float exchange rate
Option 4: Pegged exchange rate
Correct Answer:
Fixed exchange rate ‘
Solution : The correct answer is b) Fixed exchange rate
A fixed exchange rate system provides the highest level of exchange rate stability. In this system, the value of a country's currency is fixed to another currency, a basket of currencies, or a commodity. The exchange rate is set by the government or central bank and remains relatively constant over a specified period.
Under a fixed exchange rate system, the central bank intervenes in the foreign exchange market to maintain the value of the currency within a narrow range. This intervention helps to stabilize the exchange rate and reduces volatility.
Overall, a fixed exchange rate system is designed to provide the highest level of exchange rate stability by pegging the currency to a specific value.
