An article in the Wall Street Journal about the policies of the People’s Bank of China observes: “Currency intervention … expands the central bank’s balance sheet and adds to the money supply when left unsterilized, as it has been in the past.”
a. What is a “currency intervention”? Why might a central bank undertake a currency intervention?
b. Why would a currency intervention expand the central bank’s balance sheet?
c. Why does the effect of a currency intervention on a central bank’s balance sheet depend on whether the intervention has been unsterilized? In your answer, be sure to explain the difference between a sterilized currency intervention and an unsterilized currency intervention.