Suppose the Bank of Canada follows a fixed- exchange rate of 0.50 U.K.pounds per Canadian dollar.If the demand for dollars temporarily decreases, to maintain the target exchange rate, the Bank can
A)increase Canadian imports.
B)violate purchasing power parity.
C)increase Canadian exports.
D)sell dollars.
E)buy dollars.

Question

Quizplus · Accepted Answer

To maintain the fixed exchange rate, the Bank of Canada would need to intervene by either buying or selling Canadian dollars. In this scenario, since the demand for Canadian dollars has decreased, the Bank of Canada would need to buy Canadian dollars with U.K. pounds in order to maintain the fixed exchange rate of 0.50 U.K. pounds per Canadian dollar. Therefore, the correct answer is E) buy dollars.

Suppose the Bank of Canada Follows a Fixed- Exchange Rate