Fixed Exchange Rates
Exchange Rates
AO2·AO4·Diagram required
Syllabus requirement
Explains how fixed exchange rates are maintained and the concepts of devaluation and revaluation.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagram showing government intervention (e.g., buying or selling foreign reserves) to maintain a fixed exchange rate.
Summary
This topic explains fixed exchange rate systems in which a central bank buys and sells foreign currencies to keep its currency at a single predetermined rate against another currency or a basket of currencies. It covers why governments adopt fixed rates (for export competitiveness and current account stability), how central banks use foreign currency reserves to maintain the peg, and the deliberate devaluation or revaluation of a currency under a fixed system to restore the fixed rate.