How does a country fix their exchange rate? - ProProfs Discuss
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How does a country fix their exchange rate?



Asked by Chapman, Last updated: Nov 22, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

To hold an exchange rate fixed or constant, the central bank must be willing to trade currencies at the fixed exchange rate with those who trade in the foreign exchange market. To relieve upward pressure on the exchange rate, the central bank can sell domestic currency at the fixed rate. To relieve downward pressure on the fixed exchange rate, the central bank can purchase domestic currency at the fixed exchange rate. This is a very simplistic view of how a country can fix its exchange rate. For a more compete discussion, i would suggest examining some international macroeconomic theory textbooks available in most libraries.

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