If the U.S.dollar depreciates against the yen below the targeted exchange rate, the U.S.Federal Reserve has to intervene in the foreign exchange market such that:
A)the U.S.demand for yen rises.
B)the supply of U.S.dollars rises.
C)U.S.exports to Japan fall.
D)the U.S.dollar is devalued.
E)the supply of U.S.dollars falls.

Question

Quizplus · Accepted Answer

If the U.S.dollar depreciates against the yen, it means it takes more U.S.dollars to buy one yen. Therefore, the supply of U.S.dollars in the foreign exchange market has to fall in order to increase the value of the U.S.dollar relative to the yen. This is achieved through intervention by the U.S.Federal Reserve, which sells U.S.dollars in exchange for yen. By reducing the supply of U.S.dollars in the foreign exchange market, the U.S.Federal Reserve can increase the value of the U.S.dollar, bringing it closer to the targeted exchange rate.

If the USDollar Depreciates Against the Yen Below the Targeted Exchange Rate