-In the above figure, suppose the demand for dollars temporarily increases so that the demand curve shifts to D₁. To maintain the target exchange rate, the Fed A) can sell dollars. B) can buy dollars. C) must violate interest rate parity but not purchasing power parity. D) cannot maintain the target exchange rate.

Question

Quizplus · Accepted Answer

To maintain the target exchange rate when demand for dollars increases, the Fed can sell dollars to increase the supply, thus counteracting the increased demand and stabilizing the exchange rate.

-In the Above Figure, Suppose the Demand for Dollars Temporarily