Question

Holding other variables constant, if the exchange rate evolves from $ 0.1400 per Chinese yuan today to $ 0.1485 in six months:

Select one:

China's trade surplus with the United States should be expected to grow

China's trade surplus with the United States should be expected to shrink

Answer 1

Ans:

China's trade surplus with the United States should be expected to grow

Reason: Trade surplus is when Total value of export is more than import.

With all the other variables constant, exchange rate increases from $0.1400 per chinese yuan to $0.1485 per chinese yuan. So, it is showing that previously 1 yuan can be bought at $0.1400 and but now have to bought at $0.1485 means we have to pay more to get 1 yuan or China's trader can bought more at low price. Here, dollar has depreciate. It shows trade surplus with China is expected to grow.

With all the other variables constant, If exchange rate decreases from $0.1400 per chinese yuan to $0.1325 per chinese yuan. It means previously 1 yuan can be bought at $0.1400 and but now have to bought at $0.1325. So, we have to pay less than previous time. It indicates dollar has appreciated. It means trade surplus with China is expected to shrink