Suppose that the United States decides to ﬁx the dollar-euro exchange rate. If the U.S. central bank observes that the quantity supplied of euros exceeds the quantity demanded of euros at the ﬁxed
Exchange rate, to maintain the exchange rate, the U.S. central bank will

Question

Quizplus · Accepted Answer

If the quantity supplied of euros exceeds the quantity demanded of euros, it means that there is more supply of euros than demand for it, which will likely cause the euro to depreciate against the dollar. To maintain the fixed exchange rate, the U.S. central bank will need to buy euros using its reserves, increasing its reserves of euros as a result. This increase in demand for euros will help support the exchange rate and prevent the euro from depreciating too much.

Suppose That the United States Decides to ﬁX the Dollar-Euro