Question

(TCO C) Answer the following questions regarding direct, sterilized and nonsterilized intervention.
a. If most countries in Europe experience a recession, how might the European Central Bank use direct intervention to stimulate economic growth? (10 points)
b. What is the difference between sterilized and nonsterilized intervention? (10 points)

Answer 1

a. The European Central Bank can use direct intervention by selling Euros in the foreign exchange market. This will cause the Euro to depreciate against other currencies and result in increased demand for imports from Europe as now these imports are cheaper. This increase in demand for European imports will stimulate the economic growth.

b. A sterilized intervention is the purchase or sale of foreign currency by a central bank to influence the exchange value of the domestic currency, without changing the money supply.

Whereas nonsterilized intervention is a central bank's attempt to influence exchange rates by refusing to buy or sell assets or currencies. This allows the money supply to change without interference of the central bank.