Final answer:
Thailand's central bank can increase interest rates to attract both domestic and foreign investors, thus increasing demand for the baht and stabilizing the currency. This action is part of a monetary policy that can have short-term contractionary effects on the GDP but is seen as necessary for financial stability during a crisis.
Step-by-step explanation:
To prevent a withdrawal of funds from its country and to stabilize the currency's value, Thailand's central bank could use monetary policy to manipulate interest rates. If the central bank increases interest rates, it can make the Thai baht more attractive to both domestic and foreign investors who are seeking higher returns on their investments, such as Thai bonds and other financial assets. This strategy aims to increase the demand for the baht, which should help to prevent the currency from depreciating further.
However, it's important to note that higher interest rates can lead to contractionary monetary policy, which may decrease real GDP in the short term. Despite the risk, the Thai government, in coordination with the International Monetary Fund (IMF), found this measure necessary to stabilize its currency during a financial crisis. Additionally, fiscal policy was also tightened in anticipation of the future costs of restructuring its banking system, with the hope of resuming growth after the immediate crisis was resolved and other imbalances in the economy were addressed. To prevent further changes in the currency's value and discourage a withdrawal of funds from Thailand, the central bank can use interest rates as a tool. In this case, the central bank can raise interest rates to make it more attractive for investors to keep their funds in Thailand rather than withdrawing them. When interest rates are higher in Thailand compared to other countries, foreign investors will be more likely to invest in Thai financial assets, which increases the demand for Thai currency and helps stabilize the exchange rate.