Suppose that the U.S. dollar depreciates in value against the South African rand and the Fed intervenes in the foreign exchange market by selling its rand holdings in exchange for dollars. To sterilize the effect of the intervention on the domestic money supply the Fed has to
A) sell U.S. government bonds in the domestic open market.
B) buy U.S. government bonds in the domestic open market.
C) buy U.S. dollars in the foreign exchange market.
D) sell South African government bonds in the international market.

Question

Quizplus · Accepted Answer

To sterilize the effect of selling rand for dollars, which increases the domestic money supply, the Fed would buy U.S. government bonds to decrease the money supply back to its original level.

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