A fixed exchange rate is a system where a country's currency value is tied or pegged to another major currency, such as 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 central bank must actively buy or sell its currency in the foreign exchange market. This can help prevent large fluctuations in currency value, making it easier for businesses and investors to plan for the future. However, it can also limit a country's ability to respond to economic changes.