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Figure: Exchange Market Intervention
-(Figure: Exchange Market Intervention) Look at panel (a) in the figure Exchange Market Intervention. Which of the following approaches could the Genovian government use to raise the value of the geno above its present equilibrium exchange rate and into the target range?

Question

Use the following to answer questions :
Figure: Exchange Market Intervention 
-(Figure: Exchange Market Intervention) Look at panel (a) in the figure Exchange Market Intervention. Which of the following approaches could the Genovian government use to raise the value of the geno above its present equilibrium exchange rate and into the target range?

Quizplus · Accepted Answer

Panel (a) shows that the equilibrium exchange rate is below the target range. This indicates that the demand for genos is relatively low compared to the supply. To raise the value of the geno and bring it into the target range, the government could shift the demand curve to the right by raising interest rates. This would encourage investors to deposit their money in Genovia, increasing the demand for genos, and ultimately raising its value. Option A involves using the government's own currency to buy U.S. dollars, which would increase the supply of genos and decrease the supply of dollars, leading to a depreciation of the geno. Option C would increase the supply of dollars, which would further depress the value of the geno. Option D would limit the supply of dollars, reducing demand for genos, and potentially leading to a contraction of the Genovian economy.

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