Fixed Exchange Rates
Fixed exchange rates occur when governments maintain currency values at predetermined levels. Central banks intervene in currency markets, buying and selling to maintain the fixed rate.
Real World
The UK's 1992 Black Wednesday crisis — where the government spent £3.3 billion defending the pound's fixed rate in the ERM before being forced to withdraw — shows how fixed rates can become unsustainable under speculative pressure.
Exam Focus
When assessing fixed rates, explicitly weigh the benefit of certainty against the cost of lost policy independence for full marks.
How well did you know this?