A foreign exchange intervention by a central bank affects the value of a country's currency because it:

Question

Quizplus · Accepted Answer

When a central bank intervenes in the foreign exchange market, it buys or sells its own currency in exchange for a foreign currency. This affects the banking system reserves, as the central bank will need to use its own reserves to conduct the transaction. Additionally, buying or selling large amounts of currency can affect interest rates in the economy, as it influences the supply and demand of money. Therefore, option D (Alters banking system reserves and it changes domestic interest rates) is the best choice. Option C (Results in a fixed exchange rate) may be a result of intervention, but it is not the direct impact of the intervention itself.

A Foreign Exchange Intervention by a Central Bank Affects the Value