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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 Preview

    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 ...

    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.