In the foreign exchange market, if the demand for dollars permanently decreases, the Fed can maintain the exchange rate at its old equilibrium level indefinitely by buying dollars.

Question

Quizplus · Accepted Answer

The Fed can intervene in the short term by buying dollars to support its value, but maintaining the exchange rate indefinitely at its old equilibrium level would require continuous intervention, which is unsustainable in the long term if the demand for dollars has permanently decreased. Market forces will eventually overpower such interventions.

In the Foreign Exchange Market, If the Demand for Dollars