If the Bank of Canada sets a target exchange rate that is higher than the current exchange rate, then
A)the Bank will print more dollars for foreign distribution.
B)the Bank should rethink its policy.
C)the Bank can do nothing in the short run.
D)the Bank must sell dollars.
E)the Bank must buy dollars.

Question

Quizplus · Accepted Answer

If the Bank of Canada sets a target exchange rate that is higher than the current exchange rate, it means that the Bank wants the Canadian dollar to appreciate in value. To achieve this, the Bank must increase the demand for Canadian dollars and decrease the supply of Canadian dollars in the foreign exchange market. The Bank can do this by buying Canadian dollars with foreign currencies or assets. Therefore, the Bank must buy dollars.

If the Bank of Canada Sets a Target Exchange Rate