Question

For each of the following changes, holding all other variables constant, what is its effect on “e”?
(increase or decrease of e). Today we will be looking at the India (Rupee) and the China (RMB), from the
perspective of China:

Unexpected fall in Chinese imports from India
Increase in the Required Reserve Ratio in China
China announces plans to introduce currency controls next year on money leaving the country
Prime Minister of India forced to resign after a scandal
Indian budget deficits turn out to be lower than expected according to news reports
GDP Growth in India is lower than expected
India has a widening financial account deficit
Stronger than expected employment data reported in China

Answer 1

e= home price of foreign currency from China's perspective means we need to evaluate the value of Indian rupee in terms of chinese currency

• Unexpected fall in Chinese imports from India : assuming India imported less from China- supply for INR falls in China so INR will appreciate

asssuming China imports less from India- demand for INR falls so INR will depreciate

• Increase in the Required Reserve Ratio in China- purchasing power declines in China- it will import lesser from India so demand for INR will fall-INR will depreciate
• China announces plans to introduce currency controls next year on money leaving the country- more will be imported now- demand for INR rises and INR appreciates
• Prime Minister of India forced to resign after a scandal- case of loss of trust so businesses in India will be withdrawn, India based investments diluted- supply of INR will increase thus  INR depreciates
• Indian budget deficits turn out to be lower than expected according to news reports- Indian borrowing reduces which means supply of INR fall and thus INR appreciates
• GDP Growth in India is lower than expected- lesser business potential so China will not invest in India. So demand for INR decreases and INR depreciates
• India has a widening financial account deficit- so it means supply if INR is more in China and thus INR will depreciate
• Stronger than expected employment data reported in China- higher employment will mean more disposable income and so imports will increase demand for INR rises and thus INR appreciates