Question

Which of the following is true of a fixed exchange rate system?

It can lead to wildly fluctuating prices
It was primarily based on silver until the 1970s
The United States uses a fixed exchange rate system
It keeps the price of goods stable on the international market
It allows for the natural market equilibrium to dictate exchange rates

Answer 1

The statement "It keeps the price of goods stable on the international market" is true of a fixed exchange rate system.

In a fixed exchange rate system, a country's government or central bank sets a specific exchange rate for its currency in relation to another currency or a basket of currencies. This means that the exchange rate is fixed and does not fluctuate based on supply and demand in the foreign exchange market. As a result, the prices of goods and services traded internationally using these currencies are stable and predictable, which can provide some benefits for trade and investment. However, maintaining a fixed exchange rate can also be challenging and can require significant government intervention in currency markets.