5. Please look carefully at the figure below showing the RMB exchange rate move

Question

5. Please look carefully at the figure below showing the RMB exchange rate move different measurements for the period from January 1994-April 2017. .....RMB nominal effective exchange rate RMB real effective exchange rate 10 140 Spot RMB/USD (RHS) 130 120 110 100 90 80 70 60 Figure: RMB Exchange Rates: yuan/dollar, nominal and real effective exchange rate index (2010-100), all in monthly average. Data sources: for the yuan/dollar, http://fx sauder.ubc.ca/cgi/fxdata for the indexe http://www,bis, org/statistics/eer. htm A. Comment the pattern of the change in the spot rate over time, and discuss its likely relaticn t on the possible relation between the spot rate and effective indexes, perhaps by c Comment on the possible relation between the nominal and real nominal effective rate with the underlying RMB exchange rate regime and its change. categorizing it into several sub-periods. indexes, keeping in mind that the relation may change from time to time.

Explanation / Answer

A. Spot rate pattern: it has fallen b/w year 1994-95 and remained almost constant till the year 2004. It again started falling from 2005-08 with a rise only after 2014.

the spot rate shows yaun/ dollar i,e if it ihas fallen from 8 yaun/dollar to 6 yaun/dollar , yaun has appreciated in value becuse initialy it required 8 yaun to buy 1 dollar and now only 6 yaun is required and vice-versa.

I can find negative relation between the spot rate and the exchange rate (though not ver strong) plus changes in spot rate comes first followed by echange rates.

B. period can be sub divide into 4 parts

1) 1994-95 :fall in spot rate and rise in exchange rate

2) 1995-2004: almost constant spot and exchange rate,no trend as such

3) 2005-14: fall in spot rate and rise in exchange rate

4) 2014 onwards: rise in spot rate and fall in exchange rate

though there is lag in exchange rate change , it appears after a some time after spot rate has changed

C. real rate =nominal rate-inflation change

there is amost positive reation between the two rate and both of them move in the same direction.

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