Assume that there is an unexpected increase in the demand for U.S.dollars in Switzerland.If the foreign currency price of the U.S.dollar is fixed, the U.S.Federal Reserve must intervene in the foreign exchange market such that:
A)the supply of U.S.dollars increases.
B)the U.S.demand for the Swiss franc falls.
C)the supply of U.S.dollars decreases.
D)Swiss imports from the United States are reduced.
E)the Swiss currency is devalued.

Question

Quizplus · Accepted Answer

If the foreign currency price of the U.S. dollar is fixed, an increase in demand for U.S. dollars in Switzerland will result in excess demand in the foreign exchange market. To counteract this, the U.S. Federal Reserve must increase the supply of U.S. dollars by purchasing Swiss francs in the foreign exchange market. This will cause the price of the U.S. dollar to remain fixed, but the quantity supplied will increase to meet the excess demand. Therefore, choice A is correct.

Assume That There Is an Unexpected Increase in the Demand