If the exchange rate is higher than the Bank of Canada's target exchange rate,the Bank
A)implements purchasing power parity.
B)implements interest rate parity.
C)buys dollars.
D)sells dollars.
E)none of the above.

Question

Quizplus · Accepted Answer

If the exchange rate is higher than the Bank of Canada's target exchange rate, it means that the Canadian dollar is stronger than desired. To weaken the currency, the Bank of Canada would sell Canadian dollars and buy foreign currencies, particularly U.S. dollars. This would increase the supply of Canadian dollars in the market and decrease their value, bringing the exchange rate down to the desired level. Therefore, the correct choice is D - sells dollars.

If the Exchange Rate Is Higher Than the Bank of Canada's