Question 4(i)The Chinese Renminbi (RMB) is very strong against the US dollar due toincreased supply of dollars and has moved from 8 RMB/$1 to 6 RMB/$1. ThePeople Bank of china decides to intervene by selling Renminbi and buying USdollars to move the exchange rate to 7RMB/$1. The intervention is of the nonsterilized kind. Using a diagram for the supply and demand for dollars in the forexmarket, illustrate and comment on the intervention undertaken by the PeopleBank of China. Also comment on the implications of the intervention for the moneysupply in China and Chinese short term interest rates.(ii)Assume that you start by borrowing either $100,000 or 10,500,000 JapaneseYen. Using a starting yen per dollar exchange of 105 Yen per dollar and a one-year US interest rate of 5% and one-year Japanese interest rate of 0.5%. Explainhow a hedge fund can use the carry trade to make profits or incur losses. In youranswer, show the profits or losses in both dollars and yen in the following fourcases [(i) to (iv)] making it clear in each case what the profit or loss is in both yenand dollars.(a) The exchange rate stays the same at 105 yen per dollar.(b) The exchange rate moves to 75 yen per dollar(ic) The exchange rate moves to 125 yen per dollar(d) State the breakeven exchange rate for the carry trade

A country's trade and the flow of money between nations are regulated by the exchange rate, which is…

(i) The Chinese Renminbi (RMB) is very strong against the US dollar due to increased supply of dollars and has moved from 8 RMB/$1 to 6 RMB/$1. The People Bank of china decides to intervene by selling Renminbi and buying US dollars to move the exchange rate to 7RMB/$1. The intervention is of the non sterilized kind. Using a diagram for the supply and demand for dollars in the forex market, illustrate and comment on the intervention undertaken by the People Bank of China. Also comment on the implications of the intervention for the money supply in China and Chinese short term interest rates.

(i) The Chinese Renminbi (RMB) is very strong against the US dollar due to increased supply of dollars and has moved from 8 RMB/$1 to 6 RMB/$1. The People Bank of china decides to intervene by selling Renminbi and buying US dollars to move the exchange rate to 7RMB/$1. The intervention is of the non sterilized kind. Using a diagram for the supply and demand for dollars in the forex market, illustrate and comment on the intervention undertaken by the People Bank of China. Also comment on the implications of the intervention for the money supply in China and Chinese short term interest rates.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter14: A Macroeconomic Theory Of The Open Economy

Section: Chapter Questions

Problem 5PA

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