Scenario: Gizmovia II The Republic of Gizmovia wants to maintain the exchange rate of its currency, the gizmo, at $0.50, but the current exchange rate for the gizmo is $0.75. If Gizmovia uses exchange market intervention to decrease the value of its currency to $0.50, it should _____ gizmos and _____ dollars in the foreign exchange market.

Question

Quizplus · Accepted Answer

To decrease the value of its currency, Gizmovia should sell gizmos and buy dollars in the foreign exchange market. Selling its own currency increases its supply, thereby decreasing its value, while buying dollars decreases their supply, making them more valuable relative to the gizmo.

Scenario: Gizmovia II the Republic of Gizmovia Wants to Maintain