Explain the basic difference in a fixed (or pegged)exchange rate policy as opposed to a flexible exchange rate policy.

With a fixed exchange rate policy, the government becomes the exchange market for their currency and pegs the exchange rate. Under a fixed exchange rate, the government stands ready to buy or sell as much of its own currency as is demanded or supplied at the constant fixed rate. A government that opts for a fixed exchange rate typically places its central bank in charge of the day-to-day operations. It is then the central bank's task to exchange as much local currency for foreign currency and as much foreign currency for local currency as is necessary each day to maintain the peg. When a flexible exchange rate is used, the government does not intervene, and the market determines the exchange rate.