What is a fixed exchange rate?

A fixed exchange rate refers to a currency whose value is pegged to another currency, meaning that it is maintained at a specific value relative to that reference currency. This setup is designed to provide stability in international prices for trade and investment, as it reduces the uncertainty associated with fluctuating exchange rates. Governments or central banks actively intervene in the currency markets to enforce this fixed value, often by buying or selling their own currency against the currency to which it is pegged.

In contrast, the other options do not accurately capture the nature of a fixed exchange rate. A value determined by market forces would describe a floating exchange rate, where the currency's value fluctuates based on supply and demand dynamics. A rate that fluctuates based on inflation pertains to the general adjustments currencies may experience due to inflation rates but does not define a fixed exchange rate. Lastly, describing a temporary exchange rate for trade purposes does not align with the concept of a fixed rate, which is intended to provide long-term stability rather than a short-term solution.