Refer to Figure 12.4. To maintain the exchange rate $1.18 when demand is D₀ and supply S₁ the central bank must: A) buy Q₁ - Q₂ US dollars. B) sell Q₁ - Q₂ US dollars. C) sell Q₂ - Q₃ US dollars. D) do nothing.

Question

Quizplus · Accepted Answer

To maintain the exchange rate at $1.18 when demand is D0 and supply is S1, the central bank must sell US dollars to increase supply and meet the demand at the fixed exchange rate.