Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would:

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Sterilized intervention involves the central bank buying or selling its own currency on the foreign exchange market while simultaneously conducting offsetting operations in the domestic bond market to neutralize the impact on the domestic money supply. In this case, to counteract a depreciating dollar, the Fed would buy dollars with foreign currency to increase the value of the dollar. To sterilize this intervention and prevent an increase in the money supply (which could potentially lead to further depreciation), the Fed would also buy Treasury securities with dollars, removing those dollars from circulation.

Assume That the Dollar Has Been Consistently Depreciating Over a Long