Chapter 8R, Problem 1FRQ

a.

To determine

To draw: The graph showing the equilibrium in US foreign exchange market for the Chinese Yuan. Also, determine the impact on demand for the Chinese Yuan and the value of the Chinese Yuan relative to the US dollar if the real interest rate falls equivalent to US real rate.

Explanation of Solution

Calculation:

Graph showing equilibrium in the US foreign exchange market which is as follows:

  

Graph 1

If the interest rate is decreasing, then the demand for the Chinese Yuan will increase as investment rates are reduced which will allow the Chinese Yuan to move to the US.

ii)

The value of the Chinese Yuan is depreciating as compared to the US dollar.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.

b.

To determine

To show: The effect of change in the value of Chinese Yuan in the US current account balance.

Explanation of Solution

When the value of the Chinese Yuan is depreciating then imports from China to the US will increase. This increase in imports will increase the current account balance of the US.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.