Final answer:
A fixed exchange rate is maintained by the government or central bank setting the exchange rate and intervening in the foreign exchange market to maintain that rate, using measures such as monetary policy and the use of reserves.
Step-by-step explanation:
A fixed exchange rate is a policy where the government or central bank sets the exchange rate of its currency and maintains this set rate by intervening in the foreign exchange market. For example, if a country decides to peg its currency at a rate of 1 peso to 2 dollars, the central bank would use its reserves to buy or sell its currency to maintain this exchange rate, regardless of the underlying supply and demand. This is often done to stabilize a currency's value, making trade and investments between countries more predictable. To achieve and hold this fixed rate, central bank intervention can include measures like using international reserves to counteract currency devaluation or appreciation and the application of fiscal and monetary policies. These can steer the economy towards desired outcomes, such as stimulating exports, reducing imports, and avoiding substantial deficits in the balance of payments. Different exchange rate policies like a soft peg may involve less frequent intervention by the central bank, allowing the market forces to set the exchange rate most of the time. In contrast, a hard peg and currency unions involve more stringent methods of maintaining a fixed exchange rate, which may include losing autonomous national monetary policy control.