A sterilized purchase of foreign reserves by a central bank will cause its currency to depreciate.

Question

Quizplus · Accepted Answer

A sterilized purchase of foreign reserves involves the central bank buying foreign currency and selling an equivalent amount of domestic assets to offset the increase in the money supply. This action does not directly affect the exchange rate because it neutralizes the impact on the domestic money supply, thus not causing the currency to depreciate.

A Sterilized Purchase of Foreign Reserves by a Central Bank