Fixed Exchange Rates

Most people are used to the idea that very few things are fixed when it comes to finance and the market.

Therefore the concept of fixed exchange rates may seem strange and even not to make any real sense at all.

However, this refers to a system where by each country decides to set its currency at a fixed rate, relative to other currencies.

In addition the various monetary or fiscal policies of governments are then used to ensure that there is a fixed rate.

If there is massive supply of a currency in the markets for whatever reason, it will lead it to depreciate, and so the government has to keep the currency up by using its foreign currency reserve to buy back its own currency. And when a currency is going up, the reverse idea holds that the government could use its currency to buy foreign reserves.

For instance the International Monetary Fund allowed countries to overcome excess supply through the IMF lending its reserves to countries to enable them to keep exchange rates.

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