Why would a country lower its exchange rate?
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How does a fixed exchange rate system work? Who holds the exchange rate fixed and how? Why might a country want to hold its exchange rate fixed?
In an open economy with global capital markets and mobile capital:
a. a country has control over both its domestic money supply and exchange rate.b. a country has control of either its domestic money supply or exchange, but not both.c. a country only has control over its domestic money supply.d. a country only has control over its exchange rate.
A country that attempts to keep its exchange rate fixed will have a devaluation of its currency (or exchange rate) if the persistent balance of payments deficits cause it to amass dangerous amounts of foreign exchange reserves.
I am having trouble understanding this statement. Would you please explain how the balance of payments deficit causes a country to amass dangerous amounts of foreign exchange?