Macroeconomics 11th Edition by Michael Parkin

Exercise 12

The Federal Reserve in the International Sphere Under flexible exchange rates, the main aim of Federal Reserve foreign currency operations has been to counter disorderly conditions in exchange markets through the purchase or sale of foreign currencies (called foreign exchange intervention operations), primarily in the New York market. During some episodes of downward pressure on the foreign exchange value of the dollar, the Federal Reserve has purchased dollars (sold foreign currency) and has thereby absorbed some of the selling pressure on the dollar. Similarly, the Federal Reserve may sell dollars (purchase foreign currency) to counter upward pressure on the dollar's foreign exchange value. The Federal Reserve Bank of New York also executes transactions in the U.S. foreign exchange market for foreign monetary authorities, using their funds.
a. How does U.S. exchange rate policy described above differ from that of the 1950s and 1960s?
b. Explain how the Fed "counters disorderly conditions in exchange markets."
c. Explain why a currency can experience short-run fluctuations and how the Fed counters them. Illustrate with a graph.