If the Fed decides to maintain a fixed euro/dollar exchange rate when they sell euros:

Question

Quizplus · Accepted Answer

If the Fed decides to maintain a fixed euro/dollar exchange rate when they sell euros, it means that they will be selling euros and buying dollars in the foreign exchange market. This will increase the supply of dollars in the market, which will put downward pressure on the dollar's value. To maintain the fixed exchange rate, the Fed will have to counteract this pressure by increasing domestic interest rates, which will attract foreign investments and increase the demand for dollars. Therefore, option A is the correct answer because maintaining a fixed exchange rate will put pressure on domestic interest rates to increase.

If the Fed Decides to Maintain a Fixed Euro/dollar Exchange