Question

Explain how a central bank can use buying and selling of foreign currencies to keep its currency pegged. What would a country do in the case of an appreciation? What would it do if the currency depreciates? In which scenario is the country at risk of running out of foreign reserves?

Answer 1

ANSWER ::

-> For The Stability Of Domestic Currency And Foreign Currency Central Bank Buy And Sell The Foreign Currency To Stabilize The Exchange Rate Between Two Currency.its Help To Made The Support Price Of Domestic Currency Against Foreign Currency And Keep Its Currency Pegged.

-> in The Case Of Appreciation Central Bank Buy Foreign Currency And Sell Domestic Currency So It Reduce The Supply Of Foreign Currency And Increase The Supply Of Domestic Currency In The Economy So It Leads To Shortage Of Foreign Currency In The Country So Value Of Foreign Currency Increase In The Country And Domestic Currency Value Decrease So Central Bank Control The Currency Appreciation Buy Selling The Foreign Currency.

-> In Case Of Depreciation Central Bank Sell Foreign Currency And Buy Domestic Currency So It Increase The Supply Of Foreign Currency And Decrease The Supply Of Domestic Currency So It Provide Shortage Of Domestic Currency in The Economy so It Increase The Value Of The Domestic Currency So Central Bank Sell Foreign Currency And Buy Domestic Currency To control The Depreciation Of Currency.

-> In Appreciation Currency At A Risk Of Running Out The Foreign Reserve Because Appreciation Of Currency Increase The Import Of Currency So More Foreign Reserve Goes Out From the Country And Against Of It Appreciation Decrease The Export Because Domestic Goods Are Expensive for Foreigners So Inflow Of Foreign Currency Also Decrease So It is The Scenario In Which Country at A Risk To Running Out Of Foreign Reserve.