Suppose the Japanese government pegs the yen to the U.S. dollar. What could the Japanese central bank do to prevent depreciation of the yen against the dollar in the foreign exchange market?

Question

Quizplus · Accepted Answer

If the Japanese government pegs the yen to the U.S. dollar, it means that they have committed to maintaining a fixed exchange rate between the two currencies. To prevent depreciation of the yen against the dollar in the foreign exchange market, the Japanese central bank could intervene by buying yen and selling dollars in the foreign exchange market. This would increase the demand for yen and decrease the supply of dollars, thereby strengthening the value of the yen relative to the dollar. Lowering interest rates or printing new currency notes would not directly address the issue of exchange rate depreciation. Increasing official reserve holdings by buying dollars in the foreign exchange market could also be effective, but buying yen and selling dollars directly targets the exchange rate and is thus the best choice.

Suppose the Japanese Government Pegs the Yen to the U