The Pugelovian central bank intervenes in the foreign exchange market

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QUESTION:

The Pugelovian central bank intervenes in the foreign exchange market by selling U.S. $10 billion to prevent the Pugelovian currency (the pnut) from depreciating.

a. What impact does this have on the Pugelovian holdings of official international reserves?

b. What effect will this have on the Pugelovian money supply if the central bank does not sterilize? Explain.

c. What effect will this have on the Pugelovian money supply if the central bank does sterilize (using an open market operation in Pugelovian government bonds)? Explain.


 

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