Question3 The Reserve Bank of Australia (RBA) intends to stabilize the exchange rate by intervening in the foreign exchange market. To do so, it purchases 100 billion USD using AUD. Which of the following statements is correct? Select one alternative: a. The supply of AUD would decrease. b. The USD would depreciate against the AUD. c. If this is a non-sterilized intervention, inflationary pressure in Australia would increase. d. To sterilize this intervention, the RBA would buy government bonds from commercial banks. ResetMaximum marks: 1 Flag question undefined单项选择题
A
a. The supply of AUD would decrease.
B
b. The USD would depreciate against the AUD.
C
c. If this is a non-sterilized intervention, inflationary pressure in Australia would increase.
D
d. To sterilize this intervention, the RBA would buy government bonds from commercial banks.

Question

Question3 The Reserve Bank of Australia (RBA) intends to stabilize the exchange rate by intervening in the foreign exchange market. To do so, it purchases 100 billion USD using AUD. Which of the following statements is correct? Select one alternative: a. The supply of AUD would decrease. b. The USD would depreciate against the AUD. c. If this is a non-sterilized intervention, inflationary pressure in Australia would increase. d. To sterilize this intervention, the RBA would buy government bonds from commercial banks. ResetMaximum marks: 1 Flag question undefined单项选择题

A

a. The supply of AUD would decrease.

B

b. The USD would depreciate against the AUD.

C

c. If this is a non-sterilized intervention, inflationary pressure in Australia would increase.

D

d. To sterilize this intervention, the RBA would buy government bonds from commercial banks.

BlackTom AI · Accepted Answer

Buying foreign currency (USD) with domestic currency (AUD) increases AUD supply and raises demand for USD. This is the core mechanism linking intervention to money supply, exchange rates, and inflation.

1. Relevant knowledge points and concepts
- Foreign-exchange intervention: central bank buys foreign currency using domestic currency.
- Monetary base and money supply: when the central bank pays domestic currency to sellers, bank reserves and the monetary base rise unless offset.
- Sterilization: open-market operations (usually selling domestic government bonds) that offset changes in domestic liquidity.
- Exchange-rate mechanics: higher demand for a currency tends to appreciate it; higher supply tends to depreciate it.

2. Step-by-step reasoning
- The RBA purchases USD100 billion and pays AUD to the sellers.
- The sellers deposit their AUD proceeds into Australian banks; commercial banks’ reserves at the RBA increase by AUD100 billion.
- RBA’s balance sheet: +USD100b (foreign asset) on assets; +AUD100b in domestic liabilities (bank reserves) on liabilities.
- Unless the RBA conducts offsetting operations, the domestic monetary base increases by roughly AUD100b, which increases money supply via bank lending multipliers.

3. Intermediate accounting steps
- Before sterilization: RBA assets: +USD100b; liabilities: +Reserves (AUD) +AUD100b.
- Result: Monetary base ↑ AUD100b → broader money supply ↑ → aggregate demand rises.

4. Why the correct answer is correct
- Increased domestic money supply (non-sterilized) is expansionary and creates upward pressure on prices (inflation). Thus statement c is correct.

5. Why other options are incorrect
- a) Incorrect: The supply of AUD increases (not decreases) because the RBA is spending AUD to buy USD.
- b) Incorrect: The USD would appreciate (not depreciate) because the RBA is buying USD, increasing demand for USD relative to AUD—equivalently the AUD tends to depreciate.
- d) Incorrect: To sterilize, the RBA would sell government bonds (or RBA bills) to absorb AUD liquidity. Buying government bonds would inject more AUD and fail to sterilize.

6. Conclusion
The correct choice is c. If this intervention is non-sterilized, Australian inflationary pressure would increase, matching the provided answer.

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