Suppose That a Central Bank Sells Domestic Currency to Buy

question 2

Multiple Choice

Suppose that a central bank sells domestic currency to buy foreign assets to fix the exchange rate.To sterilize this intervention,the central bank will have to:

• A) buy bonds in the open market operations to increase domestic money supply.
• B) buy bonds in the open market operations to decrease domestic money supply.
• C) sell bonds in the open market operations to increase domestic money supply.
• D) sell bonds in the open market operations to decrease domestic money supply.

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Definitions:

Par Value

The legal capital assigned per share of a stock, which is a nominal value rather than indicative of the market price.

Discount

A reduction from the full amount or value of an item or security, often applied to bonds sold below their face value or to promote sales of products.

Coupon Interest Rate

The percentage of a bond's value that is paid out in interest to the bondholder annually, identical to the coupon rate.

Yield To Maturity

The total return anticipated on a bond if it is held until it matures, considering all interest payments and the repayment of principal.