If the Fed sells dollars to purchase yen in an attempt to prop up the yen and wishes to sterilize the transaction, the change in the monetary base in the U.S. would require the Fed to
A)use open market purchases to offset the increase in the monetary base.
B)Use open market sales to offset the increase in the monetary base.
C)use open market purchases to offset the decrease in the monetary base
D)Use open market purchases to offset the increase in the monetary base.

Question

Quizplus · Accepted Answer

Sterilization refers to the process of offsetting the impact of foreign exchange interventions on the domestic money supply. If the Fed sells dollars to purchase yen to prop up the yen, it will increase the supply of dollars in the market, which will lead to an increase in the monetary base in the U.S. To sterilize this transaction, the Fed will have to use open market sales to remove an equivalent amount of money from the economy, which will offset the increase in the monetary base. Therefore, the correct answer is B) Use open market sales to offset the increase in the monetary base.

If the Fed Sells Dollars to Purchase Yen in an Attempt