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-(Figure: Exchange Market Intervention) Refer to panel (a) in Figure: Exchange Market Intervention. Which approach could the Genovian government use to raise the value of the geno above its present equilibrium exchange rate and into the target range?

Question

Use the following to answer questions: 
-(Figure: Exchange Market Intervention) Refer to panel (a) in Figure: Exchange Market Intervention. Which approach could the Genovian government use to raise the value of the geno above its present equilibrium exchange rate and into the target range?

Quizplus · Accepted Answer

Option B, raising interest rates in Genovia, will shift the demand for genos to the right, increasing the value of the currency and potentially moving it into the target range. Option A, using its own currency to buy U.S. dollars, would decrease the supply of genos and potentially increase its value, but this is not a practical choice given the limited resources of the Genovian government. Options C and D, eliminating or tightening exchange controls, would affect the supply of genos and may have some impact on the exchange rate, but they are not as effective as adjusting interest rates.

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