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    Chinese Yuan vs US Dollar: Policy and Issues

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    1. If the US economy is operating near full employment and the exchange rate increase (the dollar appreciates), explain why the Federal Reserve will be less inclined to raise interest rates.

    2.Provide any controversial infomation over the value of the Chinese yaun in foreign currency markets. Is China still using central bank foreign exchange policy to maintain the value of the yuan? What is the current policy of the US on this issue?

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    Solution Preview

    1. If the US economy is operating near full employment and the dollar appreciates that will have two effects on the GDP front: one imports will rise (since foreign goods become cheaper in dollar terms), and two exports will fall (since American goods will become costlier in foreign currency terms). Thus the GDP will fall, since Net Exports = (Exports - Imports), falls. This can also be seen as a fall in AD, thus pushing the US towards a possible recessionary phase.

    In such a case if the Fed decides to raise ...