Final answer:
A fixed peg is a currency arrangement where the exchange rate is set at a fixed value against another currency but allowed to move within a narrow band, which is controlled by the central bank's interventions.
Step-by-step explanation:
A fixed peg in the context of currency arrangements is a type of exchange rate policy where a country's currency exchange rate is pegged at a set value against another currency or basket of currencies. This set value can fluctuate within a narrow band. In this system, the central bank maintains this fixed exchange rate by buying and selling its own currency on the foreign exchange market to counteract any changes that would move the currency out of the predetermined range. This practice differs from a hard peg, where the currency value is fixed and does not change, and from a floating rate, where the exchange rate is determined by market forces without direct government or central bank intervention.
In the context of the provided options, the most accurate description of a fixed peg would be Option 1: A currency arrangement where the exchange rate is fixed and does not change. It's important to note that even though this option is the closest, it does not fully capture the nature of a fixed peg, since there is often a narrow band within which the rate is allowed to fluctuate. None of the other options accurately describe a fixed peg. Option 2 denotes a floating rate, Option 3 describes a gold standard, and Option 4 also refers to a floating rate where rates are determined by market forces.