When a central bank engages in an unsterilized foreign exchange rate intervention to increase the country's FX rate, which of the following statements is (are) true?

Question

Quizplus · Accepted Answer

When a central bank engages in unsterilized foreign exchange rate intervention, it sells foreign assets (i.e. international reserves) and buys domestic currency in order to increase the country's FX rate. This results in a reduction of foreign assets on the central bank's balance sheet (option A) and an increase in domestic currency in circulation. However, since the central bank does not sterilize this transaction (i.e. offset the impact on the monetary base), it will lead to a reduction in the country's monetary base (option C). This reduction in the monetary base can have a tightening effect on the economy. Therefore, all of the statements are true (option D).

When a Central Bank Engages in an Unsterilized Foreign Exchange