Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively.
Figure 15.1. The Market for the Swiss Franc
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-Refer to Figure 15.1.Suppose the demand for francs increases from D₀ to D₁.Other things equal, under a fixed exchange rate system, the U.S.exchange stabilization fund could maintain a fixed exchange rate of $0.50 per franc by

Question

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively.
Figure 15.1. The Market for the Swiss Franc
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-Refer to Figure 15.1.Suppose the demand for francs increases from D₀ to D₁.Other things equal, under a fixed exchange rate system, the U.S.exchange stabilization fund could maintain a fixed exchange rate of $0.50 per franc by

Quizplus · Accepted Answer

BTo maintain a fixed exchange rate of $0.50 per franc when the demand for francs increases, the U.S. exchange stabilization fund could either sell francs for dollars or sell dollars for francs on the foreign exchange market. Selling francs for dollars would increase the supply of francs, while selling dollars for francs would reduce the supply of dollars, both actions helping to stabilize the exchange rate at the desired level.

Figure 151 Shows the Market for the Swiss Franc