If the Bank of England wanted to increase the value of the £ without affecting the UK money supply (and potentially, UK inflation), it would:

Question

BlackTom AI · Accepted Answer

Sterilized intervention: sell foreign currency reserves to buy pounds, then offset the monetary effect by purchasing domestic government bonds.

1) Relevant knowledge points and concepts
- Foreign exchange intervention: to raise the value of the domestic currency the central bank buys domestic currency (pounds) and sells foreign currency reserves. Buying pounds increases demand for sterling and appreciates its value.
- Sterilization/monetary offset: FX intervention typically changes domestic bank reserves (and thus the money supply). To avoid changing the domestic money supply, the central bank conducts an offsetting open-market operation in domestic bonds to neutralize that effect.
- Open market operations: buying government bonds from the banking system injects reserves (expansionary); selling bonds withdraws reserves (contractionary).

2) Step-by-step reasoning
- Step 1 (FX intervention): The Bank of England sells its foreign currency reserves and uses them to buy pounds on the FX market. This increases demand for sterling and tends to raise its exchange rate (appreciation).
- Step 2 (monetary effect): When the Bank buys pounds, sterling liquidity in the banking system is affected (normally reducing domestic reserves/liquidity because domestic currency is absorbed by the central bank).
- Step 3 (sterilization): To prevent any net change in the UK monetary base, the Bank performs the opposite open-market operation in domestic assets. Because the FX intervention reduced domestic reserves, the Bank must inject reserves by buying UK government bonds from banks. That purchase credits banks with reserves, offsetting the contraction.

3) Intermediate steps (flow of funds)
- FX: BoE → (sells) foreign currency reserves → Market; Market → (sells) pounds → BoE.
- Sterilization: BoE → (buys) UK government bonds → Banking system; Banking system → (receives) increased central bank reserves.

4) Why the correct answer is correct
This combination both appreciates the pound (by buying pounds with foreign reserves) and leaves the domestic money supply unchanged (by buying UK government bonds to replace the withdrawn reserves).

5) Why the other options are incorrect
- Option 2 (sell £ and buy bonds): Selling pounds would depreciate, not appreciate, sterling.  
- Option 3 (buy £ and sell bonds): Buying pounds is correct for appreciation, but selling domestic bonds would further withdraw reserves, changing (contracting) the money supply rather than sterilizing.  
- Option 4 (sell foreign reserves and sell bonds): Selling bonds would withdraw domestic liquidity, compounding any monetary contraction instead of neutralizing it.

6) Conclusion
Therefore the correct sterilized intervention is to sell foreign currency reserves to buy pounds and buy UK government bonds from the banking system, which matches the provided answer.

If the Bank of England wanted to increase the value of the £ without affecting the UK money supply (and potentially, UK inflation), it would: 单项选择题

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