The target exchange rate set by the Fed is 100 pesos per dollar. If the demand for dollars temporarily increases

Question

Quizplus · Accepted Answer

If the demand for dollars temporarily increases, the exchange rate will naturally move towards a stronger dollar and weaker peso, causing the exchange rate to move above the Fed's target rate of 100 pesos per dollar. To maintain the target rate, the Fed would need to sell dollars and buy pesos in the foreign exchange market, increasing the supply of dollars and reducing the supply of pesos until the exchange rate reaches the target rate. Therefore, the correct choice is B.

The Target Exchange Rate Set by the Fed Is 100