Maintain this fixed exchange rate

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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? Group of answer choices The Federal Reserve will need to supply dollars in the foreign exchange market and exchange them for euros to maintain the undervaluation of the currency. The Federal Reserve will need to have official reserves of euros to purchase dollars in the foreign exchange market. The Federal Reserve will need to have official reserves of dollars to purchase pesos in the foreign exchange market. The Federal Reserve will need to supply euros in the foreign exchange market to keep the currency undervalued.

Reference no: EM133637554

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