Intervention in the foreign exchange market by buying foreign exchange causes:
A) the money supply to rise.
B) the money supply to fall.
C) no effect on the money supply.
D) a capital outflow.
E) FDI to increase.

Question

Quizplus · Accepted Answer

When a country's central bank intervenes in the foreign exchange market by buying foreign exchange, it pays for these foreign currencies by essentially creating more of its own currency. This action increases the domestic money supply.

Intervention in the Foreign Exchange Market by Buying Foreign Exchange