What does it mean for a currency to be pegged?

When a currency is pegged, it means that its value is fixed or tied to another major currency, such as the US dollar or the euro. This fixed exchange rate is maintained by the country's central bank through intervention in the foreign exchange market to ensure that the value of the pegged currency remains stable against the reference currency. The primary purpose of pegging is to provide greater currency stability and predictability for trade and investment, which can be particularly important for smaller or emerging economies.

This approach can help mitigate the effects of volatility that might arise from fluctuations in market demand or inflation rates, as the pegged currency's value does not change in real-time based on these factors. Instead, it is anchored to a more stable currency, allowing for more consistent economic planning and foreign investment. As such, the correct option clearly captures the essence of a pegged currency system.