The host itself does not handle the actual FQDN. That is handled by the DNS. FQDN (Fully Qualified Domain Name) is handled by DNS translating names into IP addresses. Using the /etc/hosts file, you are essentially overriding the DNS server.

contact the API layer using internal DNS hostname of the API service for better latency. It can go straight to the application load balancer instead of passing through the external load balancer first