A fixed exchange rate: the central bank keeps the currency at a set value. The Hong Kong dollar has been fixed at about 7.8 per US dollar since 1983.
How a fixed rate is kept
Buy or sell its currency
Too weak: the central bank buys pesos with its dollar reserves. Too strong: it sells pesos.
Change interest rates
Higher rates attract savers from abroad, raising demand for pesos.
Limit money leaving
Rules on moving money abroad cut the supply of pesos.
Animated graph
Watch the graph build step by step in study mode.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it with your first topic free to keep:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
A managed rate floats, but the central bank steps in to limit the swings: China manages the renminbi this way.
Overvalued
- Held above the rate the market would set.
- Exports cost too much abroad.
- Uses up reserves; savers may move money out.
Undervalued
- Held below the market rate.
- Exports are cheap: a trade advantage.
- Trading partners may complain of unfair competition.
The points to remember
- Define it like this: "An overvalued currency has an exchange rate above its free-market equilibrium."
- Devaluation (fixed system) is a decision; depreciation (floating) is the market.
Never wonder what to study next
Get a personalized daily plan based on your exam date, progress, and weak areas. We'll tell you exactly what to review each day.
Paper 2 asked this in May 2025, in all three time zones, for 4 marks.
Text F reports falling foreign demand for the country's exports of metals.
Using an exchange rate diagram, explain how the central bank could maintain its fixed exchange rate.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct diagram and a correct explanation |
| 1–2 | A correct diagram or a correct explanation, not both |
| 3 at most | A diagram with a wrong or missing label |