Final answer:
Currency exchange rates would be fixed under a gold standard system because each currency's value is directly tied to a specific quantity of gold. This creates stable exchange rates between countries, anchored by their gold reserves. Central banks maintain these fixed rates using reserves, market interventions, and policy adjustments to balance the supply and demand for their currencies.
Step-by-step explanation:
Under a gold standard system, currency exchange rates between two countries would be fixed because each currency would be convertible into a certain amount of gold. Since the value of the currencies would be tied to a specific and stable amount of gold, the exchange rates would also be stable. This relationship effectively prevents the exchange rates from fluctuating freely due to market forces, since they are anchored by the gold reserves and agreements of the countries involved.
For example, under the Bretton Woods system, the US dollar was fixed at $35 per ounce of gold, and other currencies had fixed parities with both gold and the US dollar. As a result, exchange rates between those currencies and the US dollar were also fixed. A central bank, such as the Federal Reserve System in the US, could technically allow its currency to fall indefinitely, but not rise indefinitely, due to the need to maintain international competitiveness and prevent excessive capital inflows that could destabilize the economy.