Suppose the target exchange rate set by the Fed is 100 guilders per dollar. If the demand for dollars temporarily decreases, to maintain the target exchange rate, the Fed can

Question

Quizplus · Accepted Answer

To maintain the target exchange rate, the Fed can buy dollars, which would increase the demand for dollars and therefore help maintain the target exchange rate. Selling dollars (choice B) would decrease the supply of dollars in the market, potentially causing the exchange rate to increase above the target. Increasing exports (choice A) or imports (choice D) may affect the exchange rate indirectly, but they are not direct actions that the Fed could take to influence the exchange rate.

Suppose the Target Exchange Rate Set by the Fed Is