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Chapter 8

Q. 8.MSE.8

Assume that the Federal Reserve wants to reduce the value of the euro with respect to the dollar. How could it attempt to use indirect intervention to achieve its goal?
What is a possible adverse effect from this type of intervention?

Step-by-Step

Verified Solution

The Fed could use indirect intervention by raising U.S. interest rates so that the United States would attract more capital flows, which would place upward pressure on the dollar. However, the higher interest rates could make borrowing too expensive for some firms, and would possibly reduce economic growth.