A fixed exchange rate is a currency system where a country's currency value is tied or pegged to another major currency, like the U.S. dollar or Euro. This means that the government or central bank maintains the currency's value within a narrow band, providing stability in international trade and investment. To maintain a fixed exchange rate, the government may intervene in the foreign exchange market by buying or selling its currency. This system can help reduce volatility and inflation but may limit a country's ability to respond to economic changes, as it cannot freely adjust its currency value.