Question

1. Assume that the Fed intervenes by exchanging euros for dollars in the foreign exchange market. This will cause an ____ in the supply of euros in the foreign exchange market, and will place _______ pressure on the value of the euro.

a. outward shift; downward

b. inward shift; downward

c. inward shift; upward

d. outward shift; upward

2. Under a freely floating exchange rate system

a. central bank intervention in the foreign exchange market is not necessary.

b. exchange rates remain very stable because of offsetting economic conditions.

c. a foreign exchange market does not exist.

d. central bank intervention in the foreign exchange market is often necessary.

Answer 1

1. The correct answer is: a)

Reason: It is clearly mentioned that the Fed intervenes by exchanging euros for dollars in the foreign exchange market, thus the supply of euros increases which put a downward pressure on the value of euro.

2.The correct answer is: a)

Reason: Under a freely floating exchange rate system, the demand and supply forces interact to reach an equilibrium and central bank intervention in the foreign exchange market is not necessary.

Thanks!