What might a government impose to stabilize its currency's exchange rate?

When a government seeks to stabilize its currency's exchange rate, it may impose exchange rate controls. These controls can take several forms, such as fixing the exchange rate against another currency, allowing only certain rates for buying and selling currencies, or requiring businesses and individuals to report currency transactions.

The rationale behind using exchange rate controls is that they directly regulate the conditions under which currency can be exchanged, thus preventing excessive fluctuations that could destabilize the economy. By imposing such controls, a government aims to maintain a balance in foreign exchange supply and demand, ultimately providing a certain degree of predictability and confidence for international trade and investment.

While tax incentives for foreign funds, increased interest rates, and open market operations can influence currency stability indirectly, they do not provide the same level of direct control over exchange rates as explicit exchange rate controls do.