In a fixed currency regime, how does the currency behave?

• A. It cannot be traded internationally
• B. It trades within a fixed range and does not float
• C. It floats freely without any bounds
• D. It is pegged to the euro

Answer: (B)

In a fixed currency regime, authorities commit to keeping the exchange rate within a set level or within a narrow band, and they actively intervene in the currency market to do so. The central bank buys or sells foreign currency as needed, using its reserves, to prevent the value from drifting beyond the target. This means the currency does not float freely; it stays within the agreed bounds, providing more predictability for trade and investment. A peg to another currency is a common way to achieve this, but fixed regimes aren’t defined by pegging to one specific currency like the euro; they can anchor to different currencies or maintain a band. The market remains able to trade internationally, even though the rate is tightly managed.