If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation.

Question

Quizplus · Accepted Answer

Unsterilized intervention involves the Fed purchasing foreign currencies which will increase the money supply in the US. An increase in money supply, if not accompanied by an increase in output, can lead to inflationary pressures. Therefore, weakening the dollar through unsterilized intervention can potentially backfire and lead to inflation.

If the Fed Decides to Weaken the Dollar Utilizing Unsterilized