Scenario: Gizmovia The Republic of Gizmovia wants to maintain the exchange rate of its currency, the gizmo, at $0.50, but the current exchange rate for the gizmo is $0.40. If Gizmovia uses exchange market intervention to increase the value of its currency to $0.50, it should _____ gizmos and _____ dollars in the foreign exchange market.

Question

Quizplus · Accepted Answer

To increase the value of its currency, Gizmovia needs to increase the demand for the gizmo in the foreign exchange market. This means buying gizmos with their own currency (dollars) and selling dollars in exchange for gizmos. Therefore, Gizmovia should buy gizmos and sell dollars in the foreign exchange market to increase the value of their currency to $0.50.

Scenario: Gizmovia the Republic of Gizmovia Wants to Maintain the Exchange