Fixed versus floating exchange rate

Fixed Exchange Rate

A fixed exchange rate, also known as a pegged exchange rate, is when a country's currency value is tied to another major currency (like the US dollar) or a basket of currencies. The central bank maintains the currency's value within a narrow band by buying and selling foreign reserves.

Advantages:

1. Stability and Predictability: Fixed rates provide certainty in international prices, which can enhance trade and investment. Businesses and investors are more confident in making long-term decisions without worrying _______ ___ ________ ______ ________ ______.
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