Suppose the Bank of Canada follows a fixed exchange rate of $1 U.S. per Canadian dollar. If the demand for Canadian dollars temporarily increases, to maintain the target exchange rate, the Bank can
A)sell Canadian dollars.
B)buy Canadian dollars.
C)violate interest rate parity.
D)violate purchasing power parity.
E)enforce interest rate parity.

Question

Quizplus · Accepted Answer

To maintain a fixed exchange rate when the demand for Canadian dollars increases, the Bank of Canada would sell Canadian dollars to increase supply and keep the exchange rate stable.

Suppose the Bank of Canada Follows a Fixed Exchange Rate