3.[4 Points] Consider exchange rate between the U.S. dollar and Chinese currency

Question

3.[4 Points] Consider exchange rate between the U.S. dollar and Chinese currency Yuan.. Suppose the China's central bank follows a fixed-rate system. Show the following situation using the following demand and supply curves for Chinese currency. a.For China to maintain an overvalued currency (yuan) it has to (increase decrease) the money supplies of China. How much? Why? (decrease, For China to maintain an undervalued currency (yuan) it has to increase) the money supply of China. How much?, b. Why? c.For China to maintain an overvalued currency (yuan) it has to (buy, sell) its overvalued currency in the foreign exchange market. How much? Why? d.For China to maintain an undervalued currency (yuan) it has to (buy, sell) its undervalued currency in the foreign exchange market. How much?. Why? yuan yuan S0.25-- yuan yuan t

Explanation / Answer

Answer 3:

a. Decrease. By the amount AB. Decrease in the money supplies will increases the rate of interest in China which will attract foreign investment in the country and lead to overvalued currency as demand for yuan increases.

b. Increase. CF. Increase in the money supply will reduce the rate of interest in China wihich will lead to outflow of foreign investment and thus depreciation of Yuan.

c. Buy. AB. Increase in the demand of Yuan will lead to overvaluation of yuan with respect to dollar.

d. Sell. CF. Increase in the supply of currency or yuan will lead to undervaluation of currency with respect to dollar.

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