If the demand for U.S. dollars decreases, the Fed would likely buy dollars to raise the exchange rate back to the target rate of 90 yen per dollar.
This would be the case because when demand for a currency decreases, its value also decreases, so in order to maintain the target exchange rate, the Fed would need to intervene by buying dollars to increase its value and bring the exchange rate back to the target rate. Therefore, the correct answer is option A: "buys dollars to raise the exchange rate."
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Complete Question:
Suppose the exchange rate is 90 yen per U.S. dollar and the United States wants to keep the exchange rate at a target rate of 90 yen per U.S. dollar. If the demand for U.S. dollars decreases, the Fed ______
A. buys dollars to raise the exchange rate
B. sells dollars to raise the exchange rate
C. sells dollars to lower the exchange rate
D. buys dollars to lower the exchange rate
