How does a fixed exchange rate affect import pricing?

A fixed exchange rate system maintains a set value between a currency and another currency or a basket of currencies. When a country's currency is pegged at a fixed rate, it offers stability in exchange rates, which can significantly impact import pricing.

In the context of the correct answer, a stronger currency means that a country can buy more foreign currency with its currency. As a result, when a stronger currency is fixed, importers can purchase goods from abroad at lower prices, effectively lowering the cost of imports. This is because the exchange rate ensures that even if the currencies fluctuate in a free market, the fixed rate provides certainty and reduces the risk of cost variations for importers.

This stability encourages imports, as businesses know that they can predict costs more reliably, leading to lower prices for consumers. The effect of a strong currency resulting in lower import costs is crucial for economies that rely heavily on imported goods, as it can reduce inflationary pressures and increase consumer purchasing power.