Which exchange rate system is pegged to a currency with central bank intervention to keep it fixed?

Which exchange rate system is pegged to a currency with central bank intervention to keep it fixed?

• A. Floating-rate system
• B. Target zone
• C. Fixed-rate system
• D. Crawling peg

Answer: (C)

This question focuses on exchange rate regimes and how a central bank supports a pegged rate. In a fixed-rate system, a country ties its currency to another currency at a specific fixed level, and the central bank actively defends that level. It does this by using foreign exchange reserves to buy or sell currencies and by adjusting monetary policy as needed so the rate stays at the predetermined point. The emphasis is on keeping the exchange rate constant, not allowing it to drift with market forces. In contrast, a floating-rate system lets market supply and demand determine the rate with minimal intervention. A target zone allows some movement within a defined band, with intervention mainly near the edges. A crawling peg keeps a peg but adjusts it gradually over time, so the rate isn’t pinned at a single fixed value forever.

This question focuses on exchange rate regimes and how a central bank supports a pegged rate. In a fixed-rate system, a country ties its currency to another currency at a specific fixed level, and the central bank actively defends that level. It does this by using foreign exchange reserves to buy or sell currencies and by adjusting monetary policy as needed so the rate stays at the predetermined point. The emphasis is on keeping the exchange rate constant, not allowing it to drift with market forces.

In contrast, a floating-rate system lets market supply and demand determine the rate with minimal intervention. A target zone allows some movement within a defined band, with intervention mainly near the edges. A crawling peg keeps a peg but adjusts it gradually over time, so the rate isn’t pinned at a single fixed value forever.