What best characterizes a pegged exchange rate?

What best characterizes a pegged exchange rate?

• A. The rate floats freely against a range of currencies
• B. The rate is fixed to gold
• C. The rate is fixed to a stronger currency to stabilize the rate
• D. The rate is determined by market forces without government intervention

Answer: (D)

A pegged exchange rate means a country fixes its currency’s value to another currency (or to gold) and maintains that rate through active intervention by the central bank. They buy or sell foreign reserves and adjust monetary policy to keep the domestic price of the reference asset stable, often within a narrow band. This creates stability against the reference currency and can help with import pricing and inflation expectations, but it requires keeping substantial reserves and can limit the country’s ability to respond to other economic changes. Because a peg relies on intervention to hold the value steady, it is not determined by market forces alone. That’s what a freely floating rate would be.

A pegged exchange rate means a country fixes its currency’s value to another currency (or to gold) and maintains that rate through active intervention by the central bank. They buy or sell foreign reserves and adjust monetary policy to keep the domestic price of the reference asset stable, often within a narrow band. This creates stability against the reference currency and can help with import pricing and inflation expectations, but it requires keeping substantial reserves and can limit the country’s ability to respond to other economic changes.

Because a peg relies on intervention to hold the value steady, it is not determined by market forces alone. That’s what a freely floating rate would be.