Explain how the Fed intervenes in the foreign exchange market and ...

[P68T]

Explain how the Fed intervenes in the foreign exchange market and what the effects are of the Fed's actions.
 
  What will be an ideal response?

Question 2

Liz has a comparative advantage in ________ and an absolute advantage in ________.
 
  A) smoothies only; both goods
  B) salads only; salads only
  C) both goods; both goods
  D) salads only; both goods
  E) smoothies only; smoothies only

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Answer to Question 1

The Fed changes the value of the exchange rate by buying or selling dollars in the foreign exchange market. If the Fed deems it necessary to appreciate the exchange rate (raise the exchange rate) it will buy dollars. By so doing it increases the demand for dollars and thereby raises the exchange rate. If the Fed wants to depreciate the exchange rate (lower the exchange rate) the Fed will sell dollars. By selling dollars the Fed will increase the supply of dollars and lower the exchange rate.

Answer to Question 2

A

[P68T]

Excellent

[bdobbins]

Great answer, keep it coming