A pegged rate, or fixed exchange rate, can keep a country’s exchange rate low, helping with exports. Conversely, pegged rates can sometimes lead to higher long-term inflation. Maintaining a pegged exchange rate usually requires a large amount of capital reserves.

International monetary system refers to the system and rules that govern the use and exchange of money around the world and between countries. Each country has its own currency as money and the international monetary system governs the rules for valuing and exchanging these currencies.

ADVERTISEMENTS: International monetary system refers to a system that forms rules and standards for facilitating international trade among the nations. It helps in reallocating the capital and investment from one nation to another.

The three major types of exchange rate systems are the float, the fixed rate, and the pegged float.

An exchange rate system, also called a currency system, establishes the way in which the exchange rate is determined, i.e., the value of the domestic currency with respect to other currencies. Choosing the currency system is a pivotal element of the economic policy adopted by a country’s government.

The real exchange rate measures the price of foreign goods relative to the price of domestic goods. Mathematically, the real exchange rate is the ratio of a foreign price level and the domestic price level, multiplied by the nominal exchange rate.

A nominal exchange rate indicates how much one currency we can buy with one unit of another currency, while the real exchange rate compares the general price level of certain commodities or baskets of commodities of the two countries.

The nominal exchange rate is 1/0.855 = 1.170 USD/EUR. – The value of one unit of currency in the most important currencies: Euros, Australian Dollars, British Pounds Sterlings, Canadian Dollars, etc.

The nominal exchange rate E is defined as the number of units of the domestic currency that can purchase a unit of a given foreign currency. In practice, changes of the real exchange rate rather than its absolute level are important.

The Nominal Exchange Rate: The nominal exchange rate (NER) is the relative price of currencies of two countries. For example, if the exchange rate is £ 1 = $ 2, then a British can exchange one pound for two dollars in the world market. Similarly, an American can exchange two dollars to get one pound.