Exhibit 18-3

-Suppose the Swiss government wants to set the exchange rate at A in Exhibit 18-3.The appropriate action for the government to take after the demand shift shown is

Question

Exhibit 18-3
 
-Suppose the Swiss government wants to set the exchange rate at A in Exhibit 18-3.The appropriate action for the government to take after the demand shift shown is

Quizplus · Accepted Answer

If the Swiss government wants to set the exchange rate at A, it needs to increase its supply of francs to Canada. This will cause an increase in the supply of francs, which would offset the increase in demand, and keep the exchange rate at A. By reducing its supply of francs to Canada or reducing its demand for dollars from Canada, the exchange rate would appreciate, which is not what the Swiss government wants. Similarly, raising the price of foreign exchange in Canada or increasing the U.S. demand for goods and services from Switzerland would cause an appreciation of the Swiss franc, which is not the goal of the government.

Exhibit 18-3 -Suppose the Swiss Government Wants to Set the Exchange Rate