Question about maintaining fixed exchange rates

Question

In my textbook, borrowing from abroad is listed as one of the method to increase the value of a currency by shifting its demand curve to the right.

"If the country borrows from abroad, its loans will come in the form of foreign exchange, which when converted into [its currency] will cause an increase in the demand for [it] and hence a rightward shift in the demand curve toward D1."

I (and a group of friends) am not quite sure how this works, given that borrowing from another country and converting the funds to their own currency should increase the supply of it, leading to a rightward shift of the supply curve instead.

Please help us out by clarifying the explanation from the textbook. Thanks!

Answer 1

It is important to distinguish between the currency market (people buying and selling currency in exchange for other currency) with the goods market. The textbook is focusing on the currency market. The government using local currency to buy goods isn't an increase in the supply of local currency in the currency market.

The textbook is assuming that the government receives a loan in international currency (dollars, say) and uses that money to purchase local currency from the market -- from people and companies that are looking to sell local currency. The supply (people willing to sell local currency for dollars) doesn't change. The number of units of local currency in circulation doesn't change. The demand for local currency (people willing to buy local currency for dollars) increases because the government is suddenly doing this a lot, so the demand curve shifts.

Answer 2

In my textbook, borrowing from abroad is listed as one of the method to increase the value of a currency

The textbook is wrong. Borrowing from abroad tends to impact the exchange rate in a way that purchase power of the domestic currency decreases. A lower purchase power is the opposite of increased value.