The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 Refer to Figure 13.1.If the current equilibrium exchange rate is E₁ what action would the Fed have to take to achieve a target exchange rate of E₂? A)Sell (Q₂ - Q₁)amount of U.S.dollars. B)Buy (Q₁ - Q₃)amount of U.S.dollars. C)Buy (Q₂ - Q₃)amount of U.S.dollars. D)Buy (Q₂ - Q₁)amount of U.S.dollars. E)Sell (Q₁ - Q₃)amount of U.S.dollars.

Question

Quizplus · Accepted Answer

To achieve a target exchange rate of E₂, the Fed would have to increase the demand for U.S. dollars. This can be done by buying U.S. dollars in the foreign exchange market, which would increase the supply of foreign currency and decrease the supply of U.S. dollars, leading to an increase in the exchange rate to the target level. Therefore, the Fed would have to buy (Q₂ - Q₁) amount of U.S. dollars.

The Figure Given Below Depicts the Equilibrium in the Foreign