What are fixed exchange rates?

A fixed exchange rate is like having a special agreement that keeps two kinds of money always equal to each other, no matter what happens.

Imagine you and your friend both have piggy banks. You agree that 1 coin from your bank will always be worth exactly 2 coins from your friend’s bank, no more, no less. That's a fixed exchange rate!

You can think of countries as people with big piggy banks. When two countries have a fixed exchange rate, they agree on how much one of their money is worth in the other’s money. This agreement helps them trade and do business without worrying about sudden changes in value.

If one country's money suddenly becomes more valuable, the other country might need to give extra coins to keep the deal fair, just like you or your friend might have to add a coin to keep things equal.

Fixed exchange rates help countries keep prices stable and make trade easier. But if too many people try to change the agreement at once, it can cause problems, kind of like when both you and your friend start adding coins all at once!