Question

Which of the following is a sterilization operation that supports the canadian dollar?

a. bank of canada buys u.s. dollars and sells government
b. bank of canada buys both u.s. dollars and government
c. bank of canada sells both u.s. dollars and government
d. bank of canada sells u.s. dollars and buys government bonds.

Answer 1

The sterilization operation by the Bank of Canada to support the Canadian dollar involves selling U.S. dollars and buying government bonds, which affects the exchange rate while neutralizing the impact on the domestic money supply.

Step-by-step explanation:

The question 'Which of the following is a sterilization operation that supports the Canadian dollar?' pertains to actions taken by the Bank of Canada to affect the value of the Canadian dollar. The correct answer is d. Bank of Canada sells U.S. dollars and buys government bonds. This operation is termed sterilization because it neutralizes the impact on the money supply. Sterilization involves two steps: first, the central bank conducts foreign exchange operations, like selling U.S. dollars, which would, under normal circumstances, influence the domestic money supply. However, to avoid this, the second step is taken, which involves offsetting the money supply change by engaging in an open market operation, such as buying government bonds. By doing so, the central bank can influence the exchange rate without altering the domestic monetary base.