Suppose the US central bank aims to bring the dollar-euro exchange rate closer to its long-run level as predicted by the purchasing power parity. What kind of monetary policy should the Fed implement? Explain your reasoning.

(1) Encourage export to European nations through reduction of export taxes.

(2) Discourage imports.

(3) Reduce Inflation and regulating the circulation of money within the economy.

(4) Encourage local production of goods and services by making soft loans available.

Explanation: purchasing power parity is a term used to describe the closeness of two currencies in terms of what value one of the currency has when compared to the other.

Monetary policies are policies through which the central bank puts actions in place to control and regulate the economy through the use of money.

In order to improve the long run exchange rate between the euro and dollar , the central bank should encourage export to European nations, when the balance of trade between the United States and Europe is favourable to the United states, then the PURCHASING POWER PARITY OF THE DOLLAR AGAINST THE EURO WILL BE CLOSER.

The Government should Discourage imports especially from Europe,through increase in import taxes when the imports reduce especially from Europe,the Purchasing power parity between the euro and dollar will be favourable to the dollar.

Reduction in inflation which is one of the factor capable of affecting the PPP of dollar to Euro.

Encourage the local productive sector to be efficient in order to ensure people buy from the country.

explanation:

the contractual interest rate is the interest the borrower must pay and the interest the lender receives, or more simply, it is the interest rate stated on a bond whereas the market interest rate is “the investors demand for loaning funds”. therefore, bonds can either be sold at a premium, face value, or discount.