-In the figure above, suppose the demand for dollars temporarily decreases 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 both interest rate parity and purchasing power parity.
D) cannot maintain the target exchange rate.

Question

-In the figure above, suppose the demand for dollars temporarily decreases 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 both interest rate parity and purchasing power parity. 
D) cannot maintain the target exchange rate.

Quizplus · Accepted Answer

To maintain the target exchange rate when the demand for dollars decreases (and the demand curve shifts left), the Federal Reserve can buy dollars. This action would increase the demand for dollars, helping to stabilize or maintain the target exchange rate.

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