Question

Would it be accurate to think of a fixed exchange rate as a simultaneous price ceiling and price floor?

Answer 1

A fixed exchange rate system usually has a ceiling and a floor (“intervention points”). The central bank purchases foreign exchange at the floor and sells it at the ceiling to maintain the exchange rate within a narrow band. When the supply of dollars is greater than the demand for dollars at the floor price, the central bank purchases dollars at the floor price and adds them to its foreign exchange reserves. When the supply of dollars is less than the demand for dollars, the central bank sells dollars held in reserves at the ceiling price thereby maintaining the exchange rate.

Thus a fixed exchange rate can be thought of as a simultaneous price ceiling and price floor.