Question

(7) Suppose a country wants to fix the exchange rate of its domestic currency lower than what markets alone would bring about. Which would the central bank do, buy the domestic currency or sell the domestic currency?

(3) Suppose there are two countries that are otherwise the same (e.g. in regards to inflation and risk etc.) except that Country S3 has a strong economy and Country W3 has a weak economy. Suppose one or both of the central banks of S3 or W3 is pursuing a domestic monetary policy such that interest rates do not equalize between the two countries. Which country will tend to have the weaker currency in foreign exchange markets?

Answer 1

3. In order to lower the exchange rate of its own currency, the supply of the domestic currency needs to be higher than the equilibrium supply. Therefore, the country needs to sell the domestic currency in the market.