Reducing short term fluctuations

Hi

I want some clarification on the topic "Reducing short term fluctuations" under the topic "exchange rate and balance of payments", Chapter 17, page 16.
How would 'selling gold and foreign reserves' & 'borrowing in the form of a foreign currency loan' increase the demand for domestic currency?

Some clarification would be very helpful!

Thanks and Regards,
Shyam

 

Anyone, some help?

Thanks!
shdh

 

Hii shyam,
Gold and foreign currency will be sold in exchange of domestic currency, so this will lead to increase in supply of foreign currency and increase in demand for domestic currency because central bank sells foreign currency in exchange of domestic currency. Also similarly borrowing in the form of foreign currency and using it to buy domestic currency will increase demand.

 

Hi Divyam,

I partially got your point.
How did the supply of foreign currency increase when we have sold our foreign currency reserves for domestic currency?

Could you please explain me that what does demand refer to here? Is it the demand for the domestic currency in the domestic market (in the form of more circulation of money) or is it the demand in the exchange market?

Clarification shall be really appreciated!

Thanks & Regards,
Shyam

 

Hiii,
(i) Supply of foreign currency will increase because the currency which was in the reserves of central bank is now in the market.
(ii) It refers demand in exchange market.

 

Got it! Thanks!