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How the Fed defends the exchange rate of the dollar

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If the Fed wished to defend the exchange rate of the dollar (i.e. prevent the dollar exchange rate from falling) what policy action could it take? Explain.

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Solution Summary

This solution lists strategies that the Federal Reserve could use to prevent the $US exchange rate from falling and explains the theory behind those strategies.

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Decreasing the supply of dollars would put upward pressure on the exchange rate. The Fed controls the money supply, so it could prevent the exchange ...

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