Question

Assume that the Federal Reserve wants to weaken the USD against the Japanese Yen. Describe how this could be done through direct intervention (sterilized and unsterilized) and indirect intervention (for a trade relationship and a financial relationship). What effect (if any) would these actions have on the money supply and international reserves?

Answer 1

To weaken the USD against the Japanese Yen, the Federal Reserve can use direct intervention (sterilized and unsterilized) and indirect intervention (trade and financial relationships). These actions may have an effect on the money supply and international reserves.

Step-by-step explanation:

To weaken the USD against the Japanese Yen, the Federal Reserve can use both direct and indirect interventions. Through direct intervention, the Federal Reserve can either use sterilized intervention or unsterilized intervention. Sterilized intervention involves buying or selling foreign currencies without changing the money supply, while unsterilized intervention involves buying or selling foreign currencies and adjusting the money supply accordingly.

Indirect intervention can be achieved through trade or financial relationships. In a trade relationship, the Federal Reserve can implement policies that encourage imports and discourage exports, which can lead to a weaker USD. In a financial relationship, the Federal Reserve can influence interest rates or capital flows to impact the exchange rate.

These actions may have an effect on the money supply and international reserves. For example, unsterilized intervention can increase or decrease the money supply, depending on whether the Federal Reserve buys or sells foreign currencies. In a trade relationship, policies that encourage imports may lead to an increase in imports, which may require the use of international reserves.