How central banks used sterilization policies to maintain fixed exchange rates

During the period between World War I and World War II, many central banks followed a policy of sterilization of goldnone of the options by restricting the rate of growth in the supply of gold. by matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit. by matching inflows and outflows of gold respectively with increases and reductions in domestic money and credit.

by matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit.

The option “by matching inflows and outflows of gold respectively with increases and reductions in domestic money and credit” is the correct option.

During the period between World War I and World War II, many central banks followed a policy of sterilization of gold, which means they tried to maintain a fixed exchange rate by controlling the rate of growth in the supply of money and credit. The central banks attempted to do this by buying and selling foreign currencies and gold in the foreign exchange market. When central banks bought gold, they increased the supply of money and credit in the domestic economy. Conversely, when they sold gold, they decreased the supply of money and credit. By using this policy, central banks attempted to balance the inflows and outflows of gold so that the exchange rate would remain stable.

In order to achieve this goal, central banks had to sterilize the effects of gold flows on the domestic money supply. This meant that when gold flowed into the country, the central bank would have to reduce the supply of money and credit in the domestic economy, in order to prevent inflation from occurring. Similarly, when gold flowed out of the country, the central bank would have to increase the supply of money and credit in the domestic economy, in order to prevent deflation from occurring. Therefore, the correct option is “by matching inflows and outflows of gold respectively with increases and reductions in domestic money and credit.”

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