​If the Fed Desires to Strengthen the Dollar Without Affecting

question 73

Multiple Choice

​If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:

• A) ​exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
• B) ​exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
• C) ​exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
• D) ​exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

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Definitions:

Financial Risk

The possibility of losing money on an investment or business venture due to various financial factors.

Return on Assets

An indicator of how profitable a company is relative to its total assets, calculated as net income divided by total assets.

M&M Proposition II

A theory proposing that the value of a firm is unaffected by its capital structure, assuming no taxes and that investment returns are required to increase with leverage.

Cost of Equity

The rate of return that a company is expected to pay to its shareholders to compensate them for the risk of investing in the equity of the company.