Refer to the figure below to answer the following questions.

Figure 25.3.1
-In Figure 25.3.1, suppose the demand for dollars temporarily increases so that the demand curve shifts to D₁. To maintain the target exchange rate, the Bank of Canada
A)sells dollars.
B)buys dollars.
C)must violate interest rate parity but not purchasing power parity.
D)must raise the target exchange rate.
E)must lower the target exchange rate.

Question

Refer to the figure below to answer the following questions.
  
Figure 25.3.1
-In Figure 25.3.1, suppose the demand for dollars temporarily increases so that the demand curve shifts to D₁. To maintain the target exchange rate, the Bank of Canada
A)sells dollars. 
B)buys dollars. 
C)must violate interest rate parity but not purchasing power parity. 
D)must raise the target exchange rate. 
E)must lower the target exchange rate.

Quizplus · Accepted Answer

To maintain the target exchange rate when the demand for dollars increases, the Bank of Canada would sell dollars to increase the supply and counteract the increased demand, thus stabilizing the exchange rate.

Refer to the Figure Below to Answer the Following Questions