If the equilibrium exchange rate is below the target rate, the government should: I. buy its domestic currency in foreign exchange markets.
II) engage in expansionary monetary policy.
III) restrict the purchase of the domestic currency by foreigners.

Question

Quizplus · Accepted Answer

To raise the equilibrium exchange rate to the target rate, the government should buy its domestic currency in foreign exchange markets. This action increases demand for the currency, thereby raising its value. Expansionary monetary policy would actually lower the currency's value, and restricting purchases by foreigners is not a direct market intervention to adjust exchange rates.

If the Equilibrium Exchange Rate Is Below the Target Rate