What is a fixed exchange rate system in the context of the IB DP Economics curriculum?

In the IB DP Economics curriculum, a fixed exchange rate system is one where a country's currency value is tied or pegged to another major currency, such as the US dollar or gold. This means the exchange rate remains constant and is maintained by the country's government or central bank through interventions in the foreign exchange market.

How does a managed float exchange rate system differ from a fixed exchange rate system?

A managed float exchange rate system, also known as a dirty float, allows a currency's value to fluctuate according to the foreign exchange market, but with occasional government or central bank intervention to stabilize or influence the currency's value. This differs from a fixed exchange rate system, where the currency value is kept constant through direct government control.

What are the advantages of a fixed exchange rate system?

The advantages of a fixed exchange rate system include providing stability in international prices, reducing exchange rate risk for businesses and investors, and helping to control inflation. By maintaining a stable exchange rate, countries can facilitate international trade and investment, which is a key topic in the IB DP Economics curriculum under The Global Economy.

Why might a country choose a managed float exchange rate system?

A country might choose a managed float exchange rate system to combine the benefits of both fixed and floating exchange rates. This system allows for flexibility in responding to economic shocks and changes in the global economy while still enabling some level of control over the currency's value to prevent excessive volatility, which is crucial for maintaining economic stability.

What role do central banks play in a managed float exchange rate system?

In a managed float exchange rate system, central banks play a crucial role by intervening in the foreign exchange market to influence the currency's value. They may buy or sell their own currency to stabilize it, prevent excessive fluctuations, and achieve economic objectives such as controlling inflation or supporting export competitiveness, which are important considerations in the IB DP Economics curriculum.

Why is "Using 'depreciation' for a deliberate downward peg adjustment." a common mistake in Fixed and managed float exchange rates?

Why it happens: Similar effects. How to avoid it: Devaluation = deliberate (fixed regime). Depreciation = market-driven (floating).

The Global EconomyIB Economics SL

Fixed and managed float exchange rates

Work through the notes, try the practice questions, then take the quiz. The report tells you exactly what to revise next.

Previous Next

Learn this Topic

Start with the slides for the quick version, then go deeper with the full study notes.

Short Study Notes in the form of Slides

Read the notes first. If the method in a worked example clicks, you're ready for the questions.

Short Study Notes — Fixed and managed float exchange rates

Start with these resources to cover the key concepts, then work through the practice questions.

Page 1 / 0

Detailed Notes

Full prose, callouts and a recap — built for A* mastery, not just a quick scan.

Take these study notes with you

Download a branded PDF — full prose, callouts, recap and memorise list for Fixed and managed float exchange rates, ready to print or save offline.

Fixed and Managed Float Exchange Rates — IB Economics SL: regimes, devaluation/revaluation, intervention

Unit 4.5 continued. Alternative exchange rate regimes — fixed (peg) and managed float — and their advantages and disadvantages compared to free floating.

What you’ll learn

Mapped to the IB DP Economics SL subject guide (2022 onwards (first assessment May 2024)).

4.5.4 — Distinguish fixed, floating, and managed float regimes.
4.5.5 — Explain devaluation and revaluation.
4.5.6 — Discuss advantages and disadvantages of each regime.

Three regimes

Fixed, floating, managed.

Floating (covered in previous subtopic): market determines rate. Central bank doesn't intervene.

Fixed (pegged) exchange rate. Currency is PEGGED to another currency (or basket) at a set rate. Central bank maintains the peg by:

Buying/selling foreign reserves.
Adjusting interest rates.
Capital controls.

Example: Hong Kong dollar pegged to USD at HK$7.80 since 1983 — operated as a currency board. Saudi riyal pegged to USD. Bulgarian lev pegged to euro.

Devaluation = deliberate downward adjustment of the fixed rate (e.g. UK 1967 devaluation of sterling).

Revaluation = deliberate upward adjustment (rare in practice).

Managed (dirty) float. Currency mostly market-determined BUT central bank intervenes to:

Prevent excessive volatility.
Counter speculative attacks.
Achieve a target range (e.g. China managed renminbi against USD).
Influence trade competitiveness (sometimes accused of currency manipulation).

Most major currencies — USD, euro, yen, sterling — are TECHNICALLY floating but managed via interest rate policy and occasional intervention.

Advantages of fixed:

Stability for trade and investment (no currency risk).
Inflation discipline — can't print money without losing reserves.
Anchor for expectations — useful for credibility in countries with weak institutions.
Reduced speculation (in theory).

Disadvantages of fixed:

No independent monetary policy — interest rates must defend peg, not pursue domestic goals.
Vulnerable to speculative attacks — if market doubts peg, capital outflows force devaluation (Asian crisis 1997, sterling 1992).
Builds up imbalances — country can run deficits without exchange rate adjustment.
Reserves needed — costly to hold large dollar reserves.

Advantages of floating:

Monetary policy independence.
Automatic adjustment — deficits → depreciation → recovery.
No reserve requirement.

Disadvantages of floating:

Volatility — uncertain for trade and investment.
Speculative bubbles.
Pass-through inflation — depreciation raises import prices.

Impossible trinity (Mundell-Fleming). A country can only have TWO of: (1) fixed exchange rate, (2) free capital flows, (3) independent monetary policy. Choose two:

China historically: fixed + monetary autonomy + capital CONTROLS.
Hong Kong: fixed + free flows but NO monetary autonomy (rates set in NY).
USA: free flows + monetary autonomy but FLOATING rate.

This trinity is fundamental to international finance.

Fixed: pegged; needs reserves + monetary discipline.
Floating: market-determined; gives monetary autonomy.
Managed float: most realistic; intervention in practice.
Impossible trinity: pick 2 of 3.

How it’s examined

Paper 1: 'Discuss the advantages and disadvantages of a fixed exchange rate.' Paper 2: identify regime and analyse case.

Sources: IB Diploma Programme Economics subject guide (IBO, 2020 — first assessment 2022). Last reviewed 2026-05-31.

Master this Topic

Worked examples, formulae, definitions and the mistakes examiners flag — everything you need to push from a pass to an A*.

Take this whole topic with you

Download a branded revision sheet — worked examples, formulae, definitions and common mistakes for Fixed and managed float exchange rates, ready to print or save as PDF.

Step-by-step worked examples — Fixed and managed float exchange rates

Step-by-step solutions to past-paper-style questions on fixed and managed float exchange rates, written exactly the way a tutor would explain them at the board.

1Defending a peg
Stretch• fixed
Question
Explain how a central bank defends a fixed exchange rate during downward pressure. (4 marks)
Step-by-step solution
1. Step 1
  Downward pressure: market expects currency to fall; speculators sell.
2. Step 2
  Central bank BUYS its own currency using foreign reserves → reduces supply, supports value.
3. Step 3
  RAISES interest rates → attracts capital inflows, makes shorting expensive.
4. Step 4
  If pressure persists, may need to DEVALUE (e.g. UK 1992 sterling crisis, Asian crisis 1997).
Answer
Buy own currency with reserves; raise rates; if persistent, devalue.
2Impossible trinity
Stretch• trinity
Question
Explain the impossible trinity with reference to Hong Kong and China. (4 marks)
Step-by-step solution
1. Step 1
  Trinity: a country can only have 2 of (a) fixed exchange rate, (b) free capital flows, (c) independent monetary policy.
2. Step 2
  Hong Kong: chose (a) fixed peg to USD + (b) free capital flows. Pays the cost: NO independent monetary policy (HK rates follow US Fed).
3. Step 3
  China historically: chose (a) fixed (managed) rate + (c) monetary autonomy. Pays cost: (b) STRICT CAPITAL CONTROLS.
4. Step 4
  Different countries pick different corners based on priorities; cannot have all three.
Answer
Hong Kong: fixed + free flows, no monetary autonomy. China: fixed + monetary autonomy, with capital controls.
3Compare regimes
Building confidence• compare
Question
Compare the advantages of floating and fixed exchange rates. (4 marks)
Step-by-step solution
1. Step 1
  Floating advantage: monetary policy independence — interest rates can target domestic objectives.
2. Step 2
  Floating advantage: automatic adjustment of trade imbalances via depreciation/appreciation.
3. Step 3
  Fixed advantage: stability for trade and investment (no exchange rate risk).
4. Step 4
  Fixed advantage: inflation discipline — can't expand money supply without losing reserves.
Answer
Floating: monetary autonomy + auto-adjustment. Fixed: stability + inflation discipline.

Key Definitions and Keywords — Fixed and managed float exchange rates

Definitions to memorise and the exact keywords mark schemes credit for fixed and managed float exchange rates answers — sharpened from recent examiner reports for the 2026 IB DP Economics SL sitting.

Fixed exchange rate
Examiner keyword
Currency pegged at a set rate against another currency, maintained by central bank intervention.
Managed float
Examiner keyword
Exchange rate primarily market-determined but with central bank intervention to smooth volatility or target ranges.
Impossible trinity (Mundell-Fleming)
Examiner keyword
Country can choose at most TWO of: fixed exchange rate, free capital flows, independent monetary policy.

Common Mistakes and Misconceptions — Fixed and managed float exchange rates

The traps other students keep falling into on fixed and managed float exchange rates questions — taken from recent IB DP Economics SL examiner reports and mark schemes — and how to avoid them.

✕Using 'depreciation' for a deliberate downward peg adjustment.
Why it happens
Similar effects.
How to avoid it
Devaluation = deliberate (fixed regime). Depreciation = market-driven (floating).

Past paper style quiz

Get a report showing which sub-topics you've nailed and which ones still need work.

Fixed and managed float exchange rates — frequently asked questions

The things students keep getting wrong in this sub-topic, answered.

Fixed and managed float exchange rates

Short Study Notes in the form of Slides

Short Study Notes — Fixed and managed float exchange rates

Detailed Notes

What you’ll learn

How it’s examined

1Defending a peg

2Impossible trinity

3Compare regimes

Fixed exchange rate

Managed float

Impossible trinity (Mundell-Fleming)

✕Using 'depreciation' for a deliberate downward peg adjustment.

Past paper style quiz

Fixed and managed float exchange rates — frequently asked questions