Suppose that a central bank that is operating on the downward-sloping portion of the reserve demand curve decides to purchase $1,000 worth of foreign exchange reserves and then sterilize this foreign exchange market intervention. Show the impact on the central bank’s balance sheet. What would the overall impact be on the monetary base? What would be the impact, if any, on the exchange rate?

Assume that the intervention took place in a deep, well-functioning foreign exchange market.