Refer to the figure below to answer the following questions. Figure 9.3.1 -In Figure 9.3.1, suppose the demand for dollars temporarily decreases so that the demand curve shifts from D₀to D₂.To maintain the target exchange rate, the Bank of Canada A)sells dollars. B)buys dollars. C)must violate both interest rate parity and purchasing power parity. D)must lower the target exchange rate. E)must raise the target exchange rate.

Question

Quizplus · Accepted Answer

To maintain the target exchange rate, the Bank of Canada must intervene in the foreign exchange market by buying dollars, which will shift the supply curve to the right and bring the exchange rate back to the original target level. Selling dollars would only further depress the exchange rate, violating the target rate. Lowering or raising the target exchange rate would contradict the goal of maintaining a stable exchange rate. Violating interest rate parity and purchasing power parity would have no direct impact on the exchange rate.

Refer to the Figure Below to Answer the Following Questions