FIXED EXCHANGE RATE
FIXED EXCHANGE RATE A fixed exchange rate is a exchange rate that does not fluctuate or that changes within a pre determined rate at infrequent intervals. Government or the central monetary authority intervenes in the foreign exchange market so that exchange rates are kept fixed at a stable rate. The rate at which the currency is fixed is called per value. This per value is allowed to move in a narrow range or "band" of +_ per cent. If the sum of current account and capital account is negative , there occurs an excess supply of domestic currency in world markets. The government then intervenes using official foreign exchange reserves to purchase domestic currency. The fixed exchange rate can be explained graphically. Let us suppose that India's demand for US goods rises. This increased demand for import causes an increase in the supply of domestic currency, rupee, in the exchange market to obtain US dollars. Let DD and SS be the demand and supply curves of ...