605 #
© 2014 Pearson Canada Inc.#
Explain what is the unsterilized foreign exchange intervention.
Answer: Unsterilized foreign exchange intervention is the one where a central bank allows the
purchase or sale of domestic currency to have an effect on the monetary base. For example when
a central bank's purchase of domestic currency and corresponding sale of foreign assets in the
foreign exchange market leads to an equal decline in its international reserves and the monetary
base.
Diff: 2 Type: SA Page Ref: 494
Skill: Recall
Objective List: 20.1 Describe central bank intervention in the foreign exchange market and its
effects on the money supply and the exchange rate
Explain what is the sterilized foreign exchange intervention. Give an example.
Answer: A foreign exchange intervention with an offsetting open market operation that leaves
the monetary base unchanged is called a sterilized foreign exchange intervention. For example in
the case of a $1 billion purchase of dollars by the Bank of Canada and a corresponding $1 billion
sale of foreign assets, which as we know would decrease the monetary base by $1 billion, the
Bank can conduct an open market purchase of $1 billion of government bonds, which would
increase the monetary base by the same amount, exactly offsetting the purchase of dollars.
Diff: 2 Type: SA Page Ref: 495 - 496
Skill: Recall
Objective List: 20.1 Describe central bank intervention in the foreign exchange market and its
effects on the money supply and the exchange rate
20.2 Balance of Payments
The difference between merchandise exports and imports is called the ____ balance.
A) current account
B) capital account
C) official reserve transactions
D) trade
Answer: D
Diff: 1 Type: MC Page Ref: 496
Skill: Recall
Objective List: 20.2 Discuss international financial transactions and the balance of payments
The account that shows international transactions involving currently produced goods and
services is called the ____.
A) trade balance
B) current account
C) balance of payments
D) capital account
Answer: B
Diff: 1 Type: MC Page Ref: 496
Skill: Recall
Objective List: 20.2 Discuss international financial transactions and the balance of payments