Which term describes a currency based on the fixed exchange rate of another country's currency?

Which term describes a currency based on the fixed exchange rate of another country's currency?

• A. Pegged currency
• B. Transfer price
• C. Tax haven
• D. Bearer share

Answer: (A)

The concept being tested is how some currencies are kept at a fixed value relative to another country's currency. A pegged currency describes this arrangement, where the domestic currency is anchored to a foreign currency at a set rate, and the central bank intervenes—by buying or selling its own currency—to maintain that rate within a narrow band or exactly at the fixed value. For example, a country might peg its currency to the U.S. dollar to stabilize trade and inflation. The other terms don’t fit because they refer to different concepts: transfer price is about pricing between related entities for internal transactions, not exchange-rate policy; a tax haven is a jurisdiction with favorable taxes, unrelated to currency fixing; and bearer share is a type of stock ownership with ownership evidenced by possession of the share certificate, also unrelated to currency valuation.

The concept being tested is how some currencies are kept at a fixed value relative to another country's currency. A pegged currency describes this arrangement, where the domestic currency is anchored to a foreign currency at a set rate, and the central bank intervenes—by buying or selling its own currency—to maintain that rate within a narrow band or exactly at the fixed value. For example, a country might peg its currency to the U.S. dollar to stabilize trade and inflation.

The other terms don’t fit because they refer to different concepts: transfer price is about pricing between related entities for internal transactions, not exchange-rate policy; a tax haven is a jurisdiction with favorable taxes, unrelated to currency fixing; and bearer share is a type of stock ownership with ownership evidenced by possession of the share certificate, also unrelated to currency valuation.