Suppose the target exchange rate set by the Fed is 100 guilders per dollar. If the demand for dollars temporarily decreases, to maintain the target exchange rate, the Fed can
A) sell dollars.
B) buy dollars.
C) increase U.S. exports.
D) increase U.S. imports.

Question

Quizplus · Accepted Answer

To maintain the target exchange rate when the demand for dollars decreases, the Federal Reserve (Fed) can buy dollars. This action reduces the supply of dollars in the foreign exchange market, helping to keep the exchange rate at the targeted level. Selling dollars, increasing exports, or increasing imports would not directly help in maintaining the target exchange rate under the given circumstances.

Suppose the Target Exchange Rate Set by the Fed Is