Suppose that "fundamentals" have determined an exchange rate of 130 yen to the dollar.If the Federal Reserve wishes to maintain an exchange rate of 120 yen to the dollar,it must meet the private excess ________ dollars in the dollar-yen market by ________.

Question

Quizplus · Accepted Answer

If the Federal Reserve wishes to maintain an exchange rate of 120 yen to the dollar which is lower than the fundamental rate of 130 yen to the dollar, it needs to increase the demand for yen and decrease the demand for dollars in the dollar-yen market. Thus, it needs to meet the private excess demand for yen by buying yen with dollars, which increases the demand for yen and decreases the supply of dollars in the market. This will eventually lead to a decrease in the exchange rate to the desired level. Therefore, the correct choice is D - demand for, buying yen with dollars.

Suppose That "Fundamentals" Have Determined an Exchange Rate of 130