The purchase of foreign currency by a central bank will tend to cause ________.

Question

Quizplus · Accepted Answer

The purchase of foreign currency by a central bank will tend to cause a decrease in the relative expected return on domestic assets. This is because the purchase of foreign currency will increase the demand for foreign currency and decrease the demand for domestic currency. This will lead to an increase in the value of foreign currency and a decrease in the value of domestic currency. As a result, the expected return on domestic assets will decrease relative to the expected return on foreign assets.

The Purchase of Foreign Currency by a Central Bank Will