Refer to the figure below to answer the following questions. Figure 9.3.1 -In Figure 9.3.1, suppose the demand for dollars temporarily increases so that the demand curve shifts from D₀to D₁.To maintain the target exchange rate, the Bank of Canada A)sells dollars. B)buys dollars. C)must lower the target exchange rate. D)must raise the target exchange rate. E)must violate interest rate parity but not purchasing power parity.

Question

Quizplus · Accepted Answer

To maintain the target exchange rate when demand for dollars increases, the Bank of Canada would sell dollars to increase the supply of dollars in the foreign exchange market, thus counteracting the increased demand and stabilizing the exchange rate.

Refer to the Figure Below to Answer the Following Questions