Question

1. The Federal Reserve wishes to strengthen the dollar in the foreign exchange market and to sterilize the operation in the domestic money market. What should they do?

Answer 1

Answer - To strengthen the demand for dollars in foreign market , the fed will have to increase the demand for the dollars in foreign market. This will lead to the appreciation of the dollar. The fed can do this by purchasing the dollars from the international market. This will increase the demand for the dollar in outer market and hence lead to the appreciation of the dollar .

In the domestic economy , the sterilising of the money will mean the demand would have to be reduced. This will be done by the monetary policy of the fed. If the fed runs a contractionary monetary policy in the economy , this will reduce the supply of the money in the economy and thus , reduce the level of demand with the decrease in the purchasing power.