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A fixed exchange rate sets the value for a currency by:
B. By setting it at a specific value based on another currency.
Here's how it works:
1. **Setting a fixed exchange rate**: In a fixed exchange rate system, a country's currency value is pegged to another currency, such as the US dollar or the euro. The central bank or government determines this specific value at which the currency will be exchanged.
2. **Maintaining the pegged value**: To keep the currency at the fixed exchange rate, the central bank intervenes in the foreign exchange market. It buys or sells its own currency to ensure that the exchange rate remains stable and aligned with the pegged value.
3. **Advantages and disadvantages**: Fixed exchange rates can provide stability for international trade and investment, as businesses have certainty about exchange rate fluctuations. However, it can also lead to challenges if the pegged value is not sustainable or if there are sudden economic shocks that require adjustments.
In summary, a fixed exchange rate sets the value of a currency by pegging it to another currency at a specific rate determined by the government or central bank.
