An unexpected increase occurs in the demand for U.S. dollars in Italy. If the Fed wants the foreign currency price of the U.S. dollar to not change, it must intervene in the foreign exchange market so that
A) the supply of U.S. dollars decreases.
B) the U.S. demand for Euros falls.
C) the supply of U.S. dollars increases.
D) Italian imports are reduced.
E) the Italian currency is devalued.

Question

Quizplus · Accepted Answer

To keep the foreign currency price of the U.S. dollar stable amid increased demand for it in Italy, the Federal Reserve would need to increase the supply of U.S. dollars in the foreign exchange market. This action would counterbalance the increased demand, helping to maintain the currency's price.

An Unexpected Increase Occurs in the Demand for U