What is a fixed exchange rate?

The exchange rate is a term used to describe the value of one currency that is traded after another. These rates are generally determined by two systems. One system, known as a fixed exchange rate, concerns a business rate that remains the same despite market factors.

The currency is purchased and sold as other goods. Some people buy and sell the currency because they try to profit. Other people buy and sell currency because they may need a different currency to make different transactions. If there is a fixed exchange rate, the person receives every time they buy the same amount, and every time they sell these currencies. In general, this system works when the country decides to repair or peg, their currency to trade in the main currency, such as the United States dollar (USD) or Euro. The weaker currency is referred to as a bound currency. Major currengies are generally not bound; They float. In many cases, these authorities are referred to as central banks. Although fixed exchange courses indicate a certain degree of permanence, ratescan be adjusted. In some cases, adjustments or complete abandonment of a fixed exchange rate may be necessary.

Themes for deciding on a fixed rate system are often well meant. The country may consider this decision to be a way to ensure stability, which can assume that it will help to attract investments. However, this system was notorious about leading to problems.

Maintaining a fixed exchange rate requires the Earth to have a sufficient amount of foreign currency. This money is referred to as foreign reserves . When the country does not have sufficient reserve, eventually will miss the money to buy its own currency in exchange for the currency to which it is linked. As a result, the Earth's currency is overvalued or inflated.

This situation can be illustrated by tourism. When tourists go to a foreign country, it is usually required to exchange their national currency for a currency used in the country they visit.If there is a fixed exchange rate, they can expect to receive the same amount for replacing their national currency every time they are exchanged. When their visits are completed, they will generally want to sell the country's currency back and gain the equivalent amount of their national currency. When the country does not have insufficient reserves, it will not be able to buy its money back.