Explain how a country can peg its currency, Microeconomics

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Explain how a country can peg (fix) its currency to another currency.

Explanation of a pegged/fixed currency should centre on how the central bank uses the currency market mechanism - buying and selling its own currency - to set the exchange rate in the LR. Using an S/D diagram, show how the corridor of the exchange rate can be set and then as the central bank can intervene to prevent the exchange rate from exceeding the floor or ceiling.

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