Explain how a central bank would engage in direct intervention to decrease the value of its domestic currency
Since the 1970s it has been difficult for central banks alone to engage in direct intervention to alter the value of their domestic currency. Identify and explain at least two other activities in which a central bank could engage to alter the value of their domestic currency.
What will be an ideal response?
Answer: To decrease the value of its domestic currency, a central bank could choose to sell its own currency, thus making more of its currency available and driving down its value. Because markets have become so large, it is difficult to effectively move the market in this manner.
Alternative strategies may be to enlist other central banks to make a coordinated effort to sell the the currency into the market, thus putting more currency into play and having a greater negative impact on its value. Indirect intervention to drive down real interest rates is a second alternative, and the reduction of capital controls may be able to render a currency less valuable as well.
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