Question

Suppose that the People’s Bank of China wishes to peg the rate of exchange of its currency, the yuan, in terms of the U.S. dollar. In each of the following situations, should it add to or subtract from its dollar foreign exchange reserves? Why?

a. U.S. parents worrying about safety begin buying fewer Chinese-made toys for their children.

b. U.S. interest rates rise relative to interest rates in China, so Chinese residents seek to purchase additional U.S. financial assets.

c. Chinese furniture manufacturers produce high-quality early American furniture and successfully export large quantities of the furniture to the United States.

Answer 1