If the exchange rate is higher than the Fed's target exchange rate,the Fed would

Question

Quizplus · Accepted Answer

If the exchange rate is higher than the Fed's target exchange rate, it means that the dollar is overvalued. To decrease the exchange rate and bring it closer to the target, the Fed would have to sell dollars (option D) in the foreign exchange market. This would increase the supply of dollars, putting downward pressure on the exchange rate. Implementing purchasing power parity (option A) or interest rate parity (option B) would not directly address the issue of an overvalued exchange rate.

If the Exchange Rate Is Higher Than the Fed's Target