What is an exchange rate? Why would a government want to maintain a fixed exchange rate? If the U.S. wanted to maintain a fixed exchange rate between the Euro and the Dollar, how would it do so?
What is an exchange rate? Why would a government want to maintain a fixed exchange rate? If the U.S. wanted to maintain a fixed exchange rate between the Euro and the Dollar, how would it do so?
A fixed exchange rate is defined as a policy implemented by the government of the country or the central bank that connects the official currency exchange rate of a country to the rate of another country's currency. The purpose of a fixed exchange rate system is to keep the value of a currency within a set range. Floating exchange rate systems, in which the going rate on the foreign exchange market determines the currency price, have been used by the majority of major industrialised nations. These countries began using fixed-rate systems in the early 1970s, whereas developing economies continue to use them. For both exporters and importers, fixed rates provide greater predictability. Fixed rates also assist the government in maintaining low inflation, which reduces interest rates and increases trade and investment in the long run.
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