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© 2014 Pearson Canada Inc.#
Everything else held constant, if a central bank makes a sterilized purchase of foreign assets,
then the domestic currency will ____.
A) appreciate
B) depreciate
C) either appreciate, depreciate, or remain constant
D) not be affected
Answer: D
Diff: 1 Type: MC 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
Because sterilized interventions mean offsetting open market operations, there is no impact
on the monetary base and the money supply, and therefore a sterilized intervention ____.
A) causes the exchange rate to overshoot in the short run
B) causes the exchange rate to undershoot in the short run
C) causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate
in the long run
D) has no effect on the exchange rate
Answer: D
Diff: 2 Type: MC 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
Everything else held constant, if a central bank makes a sterilized sale of foreign assets, then
the domestic currency will ____.
A) appreciate
B) depreciate
C) either appreciate, depreciate, or remain constant
D) not be affected
Answer: D
Diff: 1 Type: MC 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
Explain how an unsterilized purchase of foreign assets impacts the exchange rate everything
else held constant.
Answer: An unsterlized intervention in which domestic currency is bought and foreign assets are
sold leads to a fall in international reserves, a fall in the money supply, and an appreciation of the
domestic currency.
Diff: 2 Type: SA Page Ref: 494 - 495
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