Pegging exchange rates at fixed levels by buying and selling to maintain the fixed rate by the central bank means that domestic and foreign currency interest rates will have to adjust to parity levels.

Question

Quizplus · Accepted Answer

When a central bank pegs exchange rates at fixed levels, they need to buy or sell currencies in order to maintain the fixed rate. This can affect interest rates in both the domestic and foreign currency markets, which will need to adjust to maintain parity.

Pegging Exchange Rates at Fixed Levels by Buying and Selling