A central bank can fix an exchange rate

Question

Quizplus · Accepted Answer

While a central bank may attempt to fix an exchange rate, it can only do so for as long as market participants believe it has the political will to maintain the fixed rate. If the market loses faith in the central bank's ability or determination to maintain the fixed rate, demand for the currency will decrease, making it difficult for the central bank to continue to prop up the fixed rate. The availability of gold or independence of monetary policy, while potentially important factors, are not the only determinants of whether a central bank can fix an exchange rate in the long term.

A Central Bank Can Fix an Exchange Rate