Answered: Explain the long-run effect of China’s…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter19: International Finance And The Foreign Exchange Market

Section: Chapter Questions

Problem 5CQ

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Explain the long-run effect of China’s current exchange rate policy. The Bush administration has declined to cite China for manipulating its currency to gain unfair trade advantages against the United States. America’s growing trade deficit with China, which last year hit an all-time high of $256.3 billion, is the largest deficit ever recorded with a single country. Chinese currency, the yuan, has risen in value by 18.4 percent against the U.S. dollar since the Chinese government loosened its currency system in July 2005. However, American manufacturers contend the yuan is still undervalued by as much as 40 percent, making Chinese products more competitive in this country and U.S. goods more expensive in China. China buys U.S. dollar- denominated securities to maintain the value of the yuan in terms of the U.S. dollar.

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