A4. The euro is very strong against the US dollar due to increased supply of dollars in the foreign exchange market and has moved from €1.30/$1 to €1.1/$1. The European Central Bank decides to intervene to move the exchange rate back to €1.30/$1. The intervention is of the non-sterilized kind. Using a diagram for the supply and demand for dollars in the forex market and also another diagram showing the overall demand and supply for Euros in the Eurozone area money markets, illustrate and comment on the intervention undertaken by the ECB including the effect on the ECB’s foreign exchange reserves. Comment on the implications of the foreign exchange market intervention for the Eurozone money supply and short-term interest rate in the Eurozone area. How effective is the non- sterilized intervention by the ECB likely to be?
A4. The euro is very strong against the US dollar due to increased supply of dollars in the foreign exchange market and has moved from €1.30/$1 to €1.1/$1. The European Central Bank decides to intervene to move the exchange rate back to €1.30/$1. The intervention is of the non-sterilized kind. Using a diagram for the supply and demand for dollars in the forex market and also another diagram showing the overall demand and supply for Euros in the Eurozone area
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