An exchange rate system is a framework that determines how the value of one currency is measured against another. There are two main types: fixed exchange rates, where a currency's value is tied to another major currency or a basket of currencies, and floating exchange rates, where the value fluctuates based on market forces like supply and demand. In a fixed exchange rate system, governments or central banks intervene to maintain the currency's value, while in a floating exchange rate system, the market determines the value without direct intervention. Each system has its advantages and disadvantages, impacting trade, investment, and economic stability.