If the U.S. government enters the foreign exchange market and sells dollars to maintain a specific exchange rate with the yen, the dollar will ________ and the yen will ________.

Question

Quizplus · Accepted Answer

When the U.S. government sells dollars in the foreign exchange market, the supply of dollars goes up, which leads to a depreciation in the value of the dollar. At the same time, the increased demand for yen leads to an appreciation of the yen's value. Therefore, the dollar will depreciate and the yen will appreciate in this scenario.

If the US Government Enters the Foreign Exchange Market and Sells Dollars