If the Federal Reserve intervenes in the foreign-exchange markets and buys foreign currencies

Question

Quizplus · Accepted Answer

When the Federal Reserve buys foreign currencies, it pays for those currencies with US dollars. This increases the supply of US dollars in circulation, which leads to a rise in the US money supply. This, in turn, leads to a depreciation of foreign currencies as they become relatively more expensive compared to US dollars. Therefore, choice C is the correct answer.

If the Federal Reserve Intervenes in the Foreign-Exchange Markets and Buys