Which exchange rate arrangement gradually widens the permissible range around a central rate to move away from a fixed rate?

Which exchange rate arrangement gradually widens the permissible range around a central rate to move away from a fixed rate?

• A. Fixed-rate system
• B. Floating-rate system
• C. Target zone
• D. Crawling peg

Answer: (D)

A crawling peg is the arrangement where the central rate is moved gradually over time, allowing the actual exchange rate to drift within a band that widens as the peg crawls away from a fixed level. This setup provides a controlled, stepwise departure from a rigid fixed rate, giving policymakers a gradual path toward more flexibility without sudden revaluations. In contrast, a fixed-rate system stays locked, a floating-rate system is determined by market forces, and a simpler target zone describes a band around a central rate but doesn’t inherently emphasize the peg’s gradual drift.

A crawling peg is the arrangement where the central rate is moved gradually over time, allowing the actual exchange rate to drift within a band that widens as the peg crawls away from a fixed level. This setup provides a controlled, stepwise departure from a rigid fixed rate, giving policymakers a gradual path toward more flexibility without sudden revaluations. In contrast, a fixed-rate system stays locked, a floating-rate system is determined by market forces, and a simpler target zone describes a band around a central rate but doesn’t inherently emphasize the peg’s gradual drift.