1.

Exchange rate: read the case study of “China Pegs the Yuan” attached at
the end of this assignment, and answer the questions below:
a. “many economists estimated the level of the undervaluation of the yuan
at 15 to 25% in 2013”. Explain what has led to the undervaluation of the
yuan? Illustrate in a demand and supply diagram with correct labeling.
- Since China has bought foreign assets such as US Treasury bonds to
increase in foreign currency reserves, it has led to the undervaluation of
the yuan.

b. Show the effect of the “large-scale exchange market intervention” in

your diagram above.
- The “large-scale exchange market intervention” has an effect to maintain
the pegged level of the exchange rate of China that could engage in the
large-scale exchange market.
c. China’s exchange rate policy has led to its trading partners feel that China
is “subsidizing its exports”. Explain how subsidizing happened.
- Because China has success the non-Chinese private investors strategy,
more business invests and the funds shift into China. Yuan became
under appreciation pressure. Chinese government tried to keep it at
fixed value in order to maintain the China’s exchange rate to engage in
large-scale exchange market intervention by selling Yuan and buying
other currencies. This action makes China’s accumulated reserves equal
to 40%. As a result, it has led to its trading partners feel that China is
subsidizing its exports.
d. Use demand and supply diagrams to show how each of the following
policy changes might eliminate the disequilibrium in the foreign exchange
market for yuan. Briefly explain in each case.
I. An appreciation of the yuan.
- When Yuan appreciates, the price will raise. As a result, the supply curve
will shift to the left.

II. Removing restrictions on Chinese who want to invest abroad.

- It will lead to appreciation others currencies while depreciation Yuan.
The demand of Yuan will decrease, the price will also fall. The demand
curve will shift to the left.