When the Central Bank Intervenes in the Foreign Exchange Market

question 32

Multiple Choice

When the central bank intervenes in the foreign exchange market by purchasing foreign currency, it also routinely engages in open market sales of government securities.Why?

• A)it has to sell securities to acquire the necessary funds
• B)to avoid a recession that may be caused by the reduction in money supply resulting from the purchase of foreign currency
• C)it wants to isolate the domestic economy from foreign competition
• D)to increase the profitability of its portfolio
• E)to prevent its intervention in the foreign exchange market from having a direct effect upon the domestic money supply

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