Suppose the Bank of Canada follows a fixed exchange rate of $1 U.S.per Canadian dollar.If the demand for Canadian dollars temporarily increases, to maintain the target exchange rate, the Bank can
A)sell Canadian dollars.
B)violate purchasing power parity.
C)buy Canadian dollars.
D)violate interest rate parity.
E)enforce interest rate parity.

Question

Quizplus · Accepted Answer

To maintain the target exchange rate when demand for Canadian dollars increases, the Bank of Canada can sell Canadian dollars. This action increases the supply of Canadian dollars in the foreign exchange market, helping to counteract the increased demand and stabilize the exchange rate at the targeted level.

Suppose the Bank of Canada Follows a Fixed Exchange Rate