There are limits to the ability of monetary authorities to use sterilized intervention in the case of a deficit because:
A)the central bank may be unwilling to increase its holdings of foreign currency beyond a certain limit.
B)the pressure from foreign countries to allow the domestic currency to appreciate will lead to large losses.
C)the central bank's ability to constantly obtain foreign currency for the sterilized intervention is constrained.
D)the export level is fixed and it cannot be allowed to drop.

Question

Quizplus · Accepted Answer

The central bank's ability to constantly obtain foreign currency for sterilized intervention is constrained, as it may not be able to find enough foreign currency to offset the domestic currency injected into the market. This can limit the effectiveness of such interventions in addressing trade deficits. Option A is incorrect because there may be other operational reasons for the central bank to limit foreign currency holdings. Option B is incorrect because a stronger domestic currency may actually lead to gains rather than losses. Option D is incorrect because the level of exports is not necessarily fixed, as it may vary based on market conditions and other factors.

There Are Limits to the Ability of Monetary Authorities to Use