To keep the U.S.dollar from depreciating against the euro, the U.S.Federal Reserve must:
A)buy euros and sell U.S.dollars.
B)buy both euros and U.S.dollars.
C)sell euros and buy U.S.dollars.
D)sell both euros and U.S.dollars.
E)buy U.S.government bonds

Question

Quizplus · Accepted Answer

To keep the value of the U.S. dollar from depreciating against the euro, the U.S. Federal Reserve must sell euros and buy U.S. dollars. This increases the demand for U.S. dollars and reduces the supply of euros in the foreign exchange market, which increases the value of the U.S. dollar relative to the euro. Buying both euros and U.S. dollars, as option B suggests, would not have any impact on the exchange rate between the two currencies. Buying U.S. government bonds, as option E suggests, could affect interest rates but would not necessarily keep the dollar from depreciating against the euro.

To Keep the U