If the Federal Reserve intervenes in the foreign-exchange markets by selling foreign currencies

Question

Quizplus · Accepted Answer

When the Federal Reserve intervenes in the foreign-exchange markets by selling foreign currencies, it reduces the U.S. money supply as it is essentially selling its foreign assets for dollars. This results in an increase in demand for dollars, causing the value of foreign currencies to depreciate. Therefore, choice B, where the U.S. money supply falls and foreign currencies depreciate, is the best answer.

If the Federal Reserve Intervenes in the Foreign-Exchange Markets by Selling