What role can the Fed play in the foreign exchange market?
What will be an ideal response?
The Federal Reserve can intervene in the foreign exchange market by (temporarily) selling or buying dollars. If the Fed sells dollars, it drives the exchange rate lower and if the Fed buys dollars, it drives the exchange rate higher. The Fed cannot buy dollars forever because it will run out of the foreign exchange it using to buy the dollars. And, the Fed likely will not want to sell dollars forever because it would accumulate ever increasing amounts of foreign exchange.
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The classical dichotomy refers to the idea that the supply of money
a. is irrelevant for understanding the determinants of nominal and real variables. b. determines nominal variables, but not real variables. c. determines real variables, but not nominal variables. d. is a determinant of both real and nominal variables.
An example of fiscal policy occurs when the government purchases fighter planes from a U.S. manufacturer.
Answer the following statement true (T) or false (F)