When dealing with unwanted capital inflows EM policymakers would sell domestic securities to control the size of the monetary base and therefore the quantity of money. According to IMF, this is appropriate when:

A. The domestic currency is undervalued.
B. The inflation rate is low.
C. The economy is operating at full capacity.

Correct Answer: C

In this case the inflation is imminent, and the EM authorities would need to make sure not to expand the monetary base due to its FX intervention activities.