Bank of China , Fix Exchage Rate, assignment help
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Between May 1995 and June 2005, the central bank of China was committed to maintaining a fixed exchange rate of the Chinese currency (the yuan) at about 0.12 U.S. dollars per one yuan (with very small variations allowed on either side of the fixed rate). During this time, there was a strong pressure for the Chinese yuan to appreciate. Draw diagram(s) with quantity of yuan on the horizontal axis and the exchange rate (U.S. dollar per yuan) on the vertical axis, and discuss the following questions:
- Where does the “pressure to appreciate” come from? (What is happening to the supply and demand curves in your diagram and why?)
- What did the Chinese central bank have to do to support the exchange rate at 0.12 U.S. dollars per one yuan?
- Is there a limit to pursuing such a support? What might be the negative consequences for the Chinese economy?
- The policy of maintaining the fixed exchange rate was abandoned in June 2005, and the yuan started appreciating. Nevertheless, various U.S. politicians (most recently Donald Trump) accused China of being a “currency manipulator”. Looking at the balance sheet of the Chinese central bank, what would be the evidence for continuing exchange rate manipulation?
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