Suppose that yesterday, the U.S. dollar was trading in the foreign exchange market at 100 yen per dollar. Today, the U.S. dollar is trading at 105 yen per dollar.
1. Which currency appreciated and which depreciated today?
2. List the events that could have caused today’s change in the value of the U.S. dollar in the foreign exchange market. Did the events on your list change the demand for U.S. dollars, the supply of U.S. dollars, or both the demand for and supply of U.S. dollars?
3. If the Fed had tried to stabilize the exchange rate at 100 yen per dollar, what action would it have taken? How would U.S. official reserves have changed?
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