The figure given below depicts the equilibrium in the foreign exchange market.?Figure 13.1

-Refer to Figure 13.1. If the current equilibrium exchange rate is E1 what action would the Fed have to take to achieve a target exchange rate of E2?
A) Sell (Q₂ - Q₁) amount of U.S. dollars.
B) Buy (Q₁ - Q₃) amount of U.S. dollars.
C) Buy (Q₂ - Q₃) amount of U.S. dollars.
D) Buy (Q₂ - Q₁) amount of U.S. dollars.
E) Sell (Q₁ - Q₃) amount of U.S. dollars.

Question

The figure given below depicts the equilibrium in the foreign exchange market.?Figure 13.1
 
-Refer to Figure 13.1. If the current equilibrium exchange rate is E1 what action would the Fed have to take to achieve a target exchange rate of E2?
A) Sell (Q₂ - Q₁) amount of U.S. dollars. 
B) Buy (Q₁ - Q₃) amount of U.S. dollars. 
C) Buy (Q₂ - Q₃) amount of U.S. dollars. 
D) Buy (Q₂ - Q₁) amount of U.S. dollars. 
E) Sell (Q₁ - Q₃) amount of U.S. dollars.

Quizplus · Accepted Answer

To achieve a target exchange rate of E2 from E1, the Fed would need to increase the value of the U.S. dollar relative to other currencies. This can be done by reducing the supply of dollars in the foreign exchange market, which is accomplished by buying dollars. The correct amount to buy would be the difference in quantity between Q2 and Q1, as this would shift the supply curve leftward to the new equilibrium at E2.

The Figure Given Below Depicts the Equilibrium in the Foreign