Question

In one paragraph, describe a fixed exchange rate regime and how it functions (you may use graphs for illustrations). Please list two nations (Name, Location, Capital, Currency, Central Bank, most significant sector of the economy) that have used or are using this system.

Answer 1

A fixed exchange rate is a regime applied by a government or a Central bank that ties the country's official exchange rate to another country's currency or to the price of gold. This is done to keep a currency's value within a narrow band and to stabilise it further. Fixed rate provide greater certainty for exporters and importers. Fixed rates help thee government to maintain low inflation, helps to keep interest rates down and stimulates rates and investment. Investors know what their currencies are worth, this makes it more attractive to foreign direct investments.

There are many countries that have pegged to dollar, fixing to dollar stabilise the economy and makes it less volatile.

Examples of two nations are:

Name	Location	Capital	Currency	Central Bank	Sector
Bahrain	Middle East	Manama	BHD	Central Bank of Bahrain	Oil
Cuba	Central America	Havana	CUC	Banco Central De Cuba	Tourism Trade and luxury items