Suppose the target exchange rate set by the Fed is 100 yen per dollar. If the demand for dollars temporarily increases, to maintain the target exchange rate, the Fed can
A) sell dollars.
B) buy dollars.
C) violate interest rate parity.
D) violate purchasing power parity.

Question

Quizplus · Accepted Answer

To maintain the target exchange rate when the demand for dollars increases, the Fed can sell dollars. This action increases the supply of dollars in the foreign exchange market, countering the effect of increased demand and helping to stabilize the exchange rate at the targeted level.

Suppose the Target Exchange Rate Set by the Fed Is