Question

Chinese government purchases foreign currency from exporting companies by the central
bank to maintain the exchange rate of the RMB to foreign currencies unchanged. When
there are some external factors increasing Chinese net exports (such as the increased
demand for Americans to buy Chinese products), the final equilibrium result will result in
China’s net exports and net capital outflows ( ), domestic savings ( ) , domestic interest
rate ( ).
A. unchanged, unchanged, unchanged
B. increase, unchanged, unchanged.
C. increase, decrease, increase.
D. unchanged, increase, decrease

Keynes proposed the theory of liquidity preference to explain how the economy
determines interest rates in the short term. The correct understanding of this theory is:
A. When interest rates rise, people are more willing to hold more liquid assets because their
rate of return rises.
B. Since liquid assets generally do not pay or pay less interest, the increase in interest rates
does not affect their holdings.
C. The opportunity cost of holding highly liquid assets is the loss of interest rates, so an
increase in interest rates causes people to hold less liquid assets.
D. People will convert weak liquid assets into strong liquid assets at all costs.

Answer 1

Answer
1.
A unchanged, unchanged, unchanged
It is essential for an exporting country like China to maintain a stable currency for maintaining desired net exports. This does not really effect the domestic savings. And as inflation rate is maintaied , the interest rates remain unchanged.

2.
C. The opportunity cost of holding highly liquid assets is the loss of interest rates, so an
increase in interest rates causes people to hold less liquid assets.
Keynes liquidity prefernce is measure with the demand of money in a graph which shows the relationship between income and moeny held. As interest rates increase the demand for money decreases.

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