-In the above figure, suppose the demand for dollars permanently decreases to D?. To maintain the target, the Fed
A) can buy dollars.
B) can sell dollars.
C) must decrease the nation's net exports.
D) cannot permanently maintain the exchange rate target of 150 yen per dollar.

Question

-In the above figure, suppose the demand for dollars permanently decreases to D?. To maintain the target, the Fed
A) can buy dollars. 
B) can sell dollars. 
C) must decrease the nation's net exports. 
D) cannot permanently maintain the exchange rate target of 150 yen per dollar.

Quizplus · Accepted Answer

To maintain a fixed exchange rate when demand for a currency decreases, a central bank can intervene by buying its own currency or selling foreign currency reserves. However, if the decrease in demand is permanent, these interventions may not be sustainable long-term, making it difficult to permanently maintain the target exchange rate.

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