An exchange rate system is a way countries manage the value of their currencies in relation to one another. It determines how much one currency is worth compared to another, influencing international trade and investment. There are different types of exchange rate systems, including fixed, floating, and pegged rates. In a fixed exchange rate system, a country's currency value is tied to another major currency, like the U.S. dollar. In contrast, a floating exchange rate system allows the currency's value to fluctuate based on market forces. This system can impact inflation, interest rates, and economic stability.