When the central bank intervenes in the foreign exchange market by purchasing foreign currency, it also routinely engages in open market sales of government securities.Why?

Question

Quizplus · Accepted Answer

When the central bank purchases foreign currency, it injects domestic currency into the economy, potentially increasing the money supply and leading to inflation. By selling government securities, the central bank is able to offset this effect by removing domestic currency from circulation. This helps to neutralize the impact of the intervention on the domestic money supply, allowing the central bank to achieve its exchange rate goals without compromising its domestic policy objectives.

When the Central Bank Intervenes in the Foreign Exchange Market