An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to

Question

Quizplus · Accepted Answer

Selling domestic currency to purchase foreign assets increases the supply of domestic currency in the foreign exchange market, leading to a depreciation of the domestic currency. However, an unsterilized intervention does not involve offsetting the increase in the money supply with a reduction in other domestic assets or liabilities, thus leading to an increase in the domestic money supply. The gain in international reserves occurs because the foreign assets purchased with domestic currency increase the country's foreign exchange reserves. Therefore, the correct answer is that the unsterilized intervention leads to an increase in the money supply (B) and a gain in international reserves (A), but not an appreciation in the domestic currency (C), which actually depreciates.

An Unsterilized Intervention in Which Domestic Currency Is Sold to Purchase