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

If the demand for dollars decreases, there will be excess supply of dollars in the foreign exchange market which will put downward pressure on the exchange rate. To maintain the target exchange rate of 100 guilders per dollar, the Fed can intervene by buying dollars, which will decrease the supply of dollars in the market and consequently increase its value relative to the guilders.

Suppose the Target Exchange Rate Set by the Fed Is