ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Key Takeaways. A floating exchange rate is determined by the private market through supply and demand. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. The reasons to peg a currency are linked to stability.

Detailed explanation-2: -A fixed or pegged rate is determined by the government through its central bank. The rate is set against another major world currency (such as the U.S. dollar, euro, or yen). To maintain its exchange rate, the government will buy and sell its own currency against the currency to which it is pegged.

Detailed explanation-3: -To maintain the fixed exchange rate, the central bank must intervene and sell foreign exchange to buy domestic currency. The foreign exchange market intervention will decrease the domestic money supply and shift the LM curve back to LM to restore the initial equilibrium at e.

Detailed explanation-4: -In a floating regime, exchange rates are generally determined by the market forces of supply and demand for foreign exchange.

Detailed explanation-5: -In a free-floating exchange rate system, exchange rates are determined by demand and supply. Exchange rates are determined by demand and supply in a managed float system, but governments intervene as buyers or sellers of currencies in an effort to influence exchange rates.