{"id":264921,"date":"2024-07-18T10:46:19","date_gmt":"2024-07-18T10:46:19","guid":{"rendered":"https:\/\/imarticus.org\/blog\/?p=264921"},"modified":"2024-09-25T11:54:26","modified_gmt":"2024-09-25T11:54:26","slug":"fixed-exchange-rate-system","status":"publish","type":"post","link":"https:\/\/imarticus.org\/blog\/fixed-exchange-rate-system\/","title":{"rendered":"What is the Fixed Exchange Rate System? Why is it Important?"},"content":{"rendered":"

Let us assume that we are an Indian company that imports exotic fruits from Thailand. We need to pay Thai Baht for our purchases, but our income is in Indian Rupees or INR. This is where exchange rates come in. They act as the conversion bridges between different currencies, allowing international trade to flow smoothly.<\/span><\/p>\n

Exchange rates constantly fluctuate based on supply and demand for each currency. However, some countries choose to implement a <\/span>fixed exchange rate system<\/span>. This means their currency's value is pegged to another stable currency, a basket of currencies, or even a commodity such as gold. In contrast, most countries today operate under a floating exchange rate system, where several key market forces determine the currency's value.<\/span><\/p>\n

Let us dive in and learn all about the <\/span>fixed exchange rate system<\/span>.<\/span><\/p>\n

Mechanics of the Fixed Exchange Rate System<\/span><\/h2>\n

The <\/span>fixed exchange rate system<\/span> functions through the central bank's active role in managing the exchange rate between the domestic currency and its chosen peg (another currency, basket of currencies, or commodity).<\/span><\/p>\n

The central bank selects a reference point for the domestic currency. This could be a single strong currency like the US Dollar or a basket of currencies representing important trading partners. The central bank fundamentally acts like a stabiliser, ensuring the exchange rate stays balanced at the predetermined level. They achieve this through two primary tools:<\/span><\/p>\n