A) compliance with export and import regulations
B) withdrawing equivalent amount of domestic currency from circulation
C) ensuring that counterfeit currency is not circulated
D) ensuring that black money is accounted for
Correct Answer: B
Solution :
[b] Capital inflows result in a build-up of foreign exchange reserves. As, these reserves are used to buy domestic currency, the domestic monetary base expands without a corresponding increase in production: too much money begins to chase too few goods and services. Therefore, inflation is bound to take place. To ease the threat of currency appreciation or inflation, central banks often attempt what is known as the sterilisation of capital flows. In a successful sterilisation operation, the domestic component of the monetary base (bank reserves plus currency) is reduced to offset the reserve inflow, at least temporarily. In theory, this can be achieved in several ways, such as by encouraging private investment overseas or allowing foreigners to borrow from the local market. The classical form of sterilisation, however, has been through the use of open market operations i.e. selling treasury bills and other instruments to reduce the domestic component of the monetary base.
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