Suppose that the free market exchange rate for the dollar is 115 yen, but the U.S. and Japanese governments want it to be 120 yen/dollar. What can the governments do? Illustrate your answer with a graph
What will be an ideal response?
As is shown in the graph, the initial demand and supply for the dollar intersect at an exchange rate of 115 yen/dollar. In order to raise the price of the dollar, the governments need to increase the demand for the dollar (shown in the graph as a shift in the demand curve). They would do this by selling yen for dollars until the exchange rate rises to the desired level of 120 yen/dollar.
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