-In the above figure, suppose the demand for dollars temporarily increases so that the demand curve shifts to D?. To maintain the target exchange rate, the Fed
A) can sell dollars.
B) can buy dollars.
C) must violate interest rate parity but not purchasing power parity.
D) cannot maintain the target exchange rate.

Question

-In the above figure, suppose the demand for dollars temporarily increases so that the demand curve shifts to D?. To maintain the target exchange rate, the Fed
A) can sell dollars. 
B) can buy dollars. 
C) must violate interest rate parity but not purchasing power parity. 
D) cannot maintain the target exchange rate.

Quizplus · Accepted Answer

To maintain the target exchange rate when demand for dollars increases, the Fed can sell dollars. This action increases the supply of dollars in the foreign exchange market, helping to counteract the increased demand and stabilize the exchange rate at its target level.

-In the Above Figure, Suppose the Demand for Dollars Temporarily