Fixed Exchange Rates

Definition

Contrary to a floating exchange rate, a fixed exchange rate is one where a central bank ensures its currency stays at a constant rate, by buying and selling both its own and foreign currencies.

Instead of being determined by a market mechanism, fixed exchange rates are decided by the central bank authority. 

Devaluation of a Currency (AO2, AO4)

• Devaluation is the deliberate fall in the value of a fixed exchange rate currency. 

  • • This can be done to improve international competitiveness, as exports will look cheaper to other countries when they need less of their money to buy your money

• There are two reasons for the central bank to start a devaluation of its currency: 

Revaluation of a Currency (AO2, AO4)

• Revaluation is the deliberate rise in the value of a fixed exchange rate currency. 

  • • This can be done to make imports cheaper, as imports will look cheaper, as you need less of your money to buy their money

• There are two reasons for the central bank to start a revaluation of its currency: