To offset an appreciation of the dollar against the yen, other things equal, the Federal Reserve would
A) sell dollars on the foreign exchange market and lower domestic interest rates.
B) sell dollars on the foreign exchange market and raise domestic interest rates.
C) buy dollars on the foreign exchange market and lower domestic interest rates.
D) buy dollars on the foreign exchange market and raise domestic interest rates.

Question

Quizplus · Accepted Answer

To offset an appreciation of the dollar against the yen, the Federal Reserve would sell dollars on the foreign exchange market to increase the supply of dollars, thereby decreasing its value. Lowering domestic interest rates would encourage borrowing and spending, further increasing the supply of dollars in the foreign exchange market, which would help to counteract the dollar's appreciation.

To Offset an Appreciation of the Dollar Against the Yen