When central bank currency operations affect the monetary base, the intervention is called:

Question

BlackTom AI · Accepted Answer

An unsterilized intervention occurs when a central bank’s foreign exchange operations change the domestic monetary base.

1) Relevant knowledge points and concepts
- Monetary base (MB) = currency in circulation + bank reserves at the central bank.
- Foreign-exchange intervention: central bank buys or sells foreign currency in exchange for domestic currency.
- Sterilized vs unsterilized: A sterilized intervention is offset by domestic open-market operations that neutralize the effect on the monetary base; an unsterilized intervention is not offset, so the MB changes.

2) Step-by-step reasoning
- If the central bank buys foreign currency (e.g., dollars) it pays with domestic currency, increasing bank reserves and/or currency in circulation. That raises the monetary base.
- If the central bank sells foreign currency, it receives domestic currency and withdraws reserves or currency, reducing the monetary base.
- If the central bank does nothing further to offset that change (no domestic bond sales or purchases), the intervention is unsterilized because the MB has been affected.

3) Intermediate calculation/example
- Suppose the central bank buys $100 million of foreign assets and credits banks with an extra $100 million in reserves.
- Change in MB = +$100 million (reserves rise by $100m).
- To sterilize, the central bank would sell $100 million of domestic government bonds to absorb $100 million of reserves → MB returns to original (ΔMB = 0). If it does not sell bonds, ΔMB = +$100m (unsterilized).

4) Why the correct answer is correct
- The defining feature of an unsterilized intervention is the direct impact on the monetary base because no offsetting open-market operation is performed. That matches the phrase “affect the monetary base.”

5) Why other options are incorrect
- b. sterilized: incorrect because sterilized interventions explicitly avoid changing the monetary base by offsetting operations.
- c. a feedback rule: irrelevant — a policy rule guiding adjustments, not a label for whether MB changes.
- d. neutral: vague and incorrect; “neutral” is not the technical term for interventions that change MB.

6) Conclusion
- Therefore the correct answer is a. unsterilized, which matches the provided answer.

When central bank currency operations affect the monetary base, the intervention is called:Single choice

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