The government believes that the current exchange rate is its long- term equilibrium. However, short- term leftward shifts in demand and rightward shifts in supply are causing the exchange rate to fall below this level. Which of the following are actions the government could take?

Question

Quizplus · Accepted Answer

To counteract a falling exchange rate, the government could borrow from abroad to increase foreign currency supply, use reserves to buy its own currency and thus increase its value, or raise interest rates to attract foreign capital, increasing demand for its currency. Lowering interest rates (C) would have the opposite effect, making the currency less attractive to foreign investors.

The Government Believes That the Current Exchange Rate Is Its