A central bank engaging in sterilization is attempting to

Question

Quizplus · Accepted Answer

Sterilization is the process by which a central bank attempts to offset the domestic money supply changes that result from fixing its exchange rate against other currencies. For example, if a central bank wants to fix its exchange rate against the US dollar, it will need to buy US dollars and sell its own currency to maintain the exchange rate. This increases the domestic money supply, which can lead to inflation. To prevent this, the central bank may engage in sterilization, which involves selling bonds to remove excess liquidity from the market and maintain price stability.

A Central Bank Engaging in Sterilization Is Attempting to