If the exchange rate is higher than the Bank of Canada's target exchange rate, the Bank
A)implements purchasing power parity.
B)implements interest rate parity.
C)buys dollars.
D)sells dollars.
E)raises the target exchange rate.

Question

Quizplus · Accepted Answer

If the exchange rate is higher than the Bank of Canada's target exchange rate, it means that the Canadian dollar is too weak. In order to strengthen the Canadian dollar and bring the exchange rate closer to the Bank of Canada's target rate, the Bank will sell Canadian dollars and buy foreign currency, such as US dollars. This increases the demand for Canadian dollars and reduces the supply, thereby increasing the value of the Canadian dollar and bringing the exchange rate closer to the target rate.

If the Exchange Rate Is Higher Than the Bank of Canada's