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Suppose the Federal Reserve wants to fix the U.S. exchange rate with the yen at $0.008...

Suppose the Federal Reserve wants to fix the U.S. exchange rate with the yen at $0.008 per yen. If the equilibrium market exchange rate were significantly lower at $0.007 per yen, what would the Fed need to do to maintain the fixed rate of $0.008 per yen? What would be the effect of these actions on the money supply in the U.S.? Explain.

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The Fed wants to fix the exchange rate at \(\$ 0.008\) per yen. The current market exchange rate is \(\$ 0.007\) per yen. To maintain the stated exchange rate, the Fed should buy Yen in exchange for Dollars in the market. Doing so, the supply of dollars will increase in the market and the price, that is., the exchange rate will fall in the market.

If the Fed does so, the supply of U.S dollar will increase in the market.

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