Suppose you travel toCali, Colombia, where the fixed exchange rate is 1 USD to2,900 Colombian pesos. Assume that a Big Mac costs$5 in the United States. As you enter aMcDonald's restaurant, you realize you need17,400 Colombian pesos to buy a Big Mac.

Which type of foreign market intervention must the central bank of Colombia conduct to keep the exchange rate at a level where the currency is notunder- or overvalued in terms ofPPP?

A.

The central bank of Columbia should undertake a sterilized foreign market intervention in which it tries to influence the interest differential between domestic and foreign assets.

B.

The central bank of Columbia should undertake a sterilized foreign market intervention in which it reduces the amount of foreign securities relative to domestic securities in the hands of the public.

C.

The central bank of Columbia should undertake an unsterilized foreign market intervention in which it buys the domestic currency(COP) and sells foreign reserves.

D.

The central bank of Columbia should undertake an unsterilized foreign market intervention in which it sells the domestic currency(COP) and purchases foreign assets.