Exchange rates state the value of one currency in terms of other currencies. Which one of the following statements with respect to the exchange rate of currency is correct ?

Exchange rate regimes are primarily classified into fixed and floating systems. A fixed exchange rate is one that is set by government or central bank decisions and maintained through active government actions, such as market intervention, to ensure stability in foreign trade [4]. In contrast, floating exchange rates are determined by the market forces of demand and supply, theoretically without government interference [4]. Regarding historical systems, the Bretton Woods system (1944–1971) involved currencies being pegged to the US dollar, which was itself anchored to gold at $35 per ounce, rather than floating based on gold prices [2]. Under the classical gold standard, currencies were fixed directly in terms of gold, not the dollar. Therefore, option 2 is the only accurate description of a currency regime's fundamental mechanism as defined in standard economic theory.

Sources

1. [1] India and the Contemporary World – II. History-Class X . NCERT(Revised ed 2025) > Chapter 3: The Making of a Global World > New words > p. 77
2. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > CHAPTER SUMMARY > p. 507
3. [4] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > National Income Identity for an Open Economy > p. 102
4. [2] India and the Contemporary World – II. History-Class X . NCERT(Revised ed 2025) > Chapter 3: The Making of a Global World > 4.1 Post-war Settlement and the Bretton Woods Institutions > p. 75