Why would a nation use domestic stabilization policies to eliminate shortages in foreign currency?

1 answer:

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A nation would use the domestic stabilization policies to eliminate the shortage of foreign currency in order to maintain fixed exchange rate.

Domestic stabilization policies such as monetary policy and fiscal policy can be used to eliminate the shortage of foreign currency in order to main fixed exchange rate.

The fiscal policy promotes macroeconomic stability by sustaining aggregate demand and private sector incomes during an economic downturn and moderates economic activity during economic growth.

If the exchange rate drifts too far below the desired rate, the government would buy its own currency in the market by selling its reserves. A fixed exchange rate is determined by the government through its central bank.

Hence, The policy of domestic stabilization is used by a nation to eliminate the shortage of foreign currency in order to maintain fixed exchange rate.

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