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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


Team Careers360 3rd Jan, 2024
Answer (1)
Team Careers360 6th Jan, 2024

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.

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