Answer to Question #140512 in Accounting for Adoltina Muremi

Question

What role can the Fed/central Bank play in the foreign exchange market

Answer 1

Solution:

Federal/central banks are the government agencies that regulate their national currencies in order to create stability in the economic environment, prevent inflation, and stimulate growth in the economy. They set the monetary policies to regulate the supply of their currencies to keep their economies moving at sustainable levels. The federal/central bank's decisions regarding monetary policy are incredibly influential on exchange rate determination.

Also, federal/central banks tackle the domestic economy problems by changing the quantity of money and interest rates, which also leads to changes in the exchange rate.

The federal/central banks also directly impact exchange rates through interventions into foreign exchange markets. They can utilize their domestic currency and foreign reserves to purchase or sell foreign currencies directly in the foreign exchange market.