One lesson policymakers have learned, and which was evident from Japan's experience in 2002, is:
A) an intervention in the foreign exchange market will not work unless accompanied by a change in the policy interest rate.
B) an intervention in the foreign exchange market is almost always effective if done on a regular basis.
C) in order for foreign exchange interventions to work, they must be frequent and expected.
D) for an intervention in the foreign exchange market to work, the interest rate must be held constant by the central bank.

Question

Quizplus · Accepted Answer

Policymakers have learned that foreign exchange interventions are not effective unless accompanied by changes in policy interest rates. Japan's experience in 2002 showed that despite the Bank of Japan's intervention in the currency market, the value of the yen continued to rise due to the bank's inability to ease monetary policy through lower interest rates. This demonstrated the importance of coordinating interventions with changes in interest rates to achieve the desired effect on exchange rates.

One Lesson Policymakers Have Learned, and Which Was Evident from Japan's