Question

Suppose that the equilibrium exchange rate (Euro/$) is .90 and the The Federal Reserve decides to fix the exchange rate at .70. What will the Federal Reserve have to do in order to maintain this fixed exchange rate

Answer 1

The Federal Reserve will need to have official reserves of euros to purchase dollars in the foreign exchange market.

Step-by-step explanation:

Answer 2

C. The Federal Reserve will need to have official reserves of euros to purchase dollars in the foreign exchange market.

Step-by-step explanation:

Federal Reserve required to have a euros reserves as it can applied it also at the case when the exchange rate is move upward or downward

For the other things, the fed could restrict the supply with respect to the dollar in the foreign exchange market in order to get it stable that opposed with euro

Therefore the option c is correct