Chapter 43, Problem 1CYU

a)

To determine

To draw: Graph representing when the exchange rate floats freely.

Explanation of Solution

  

Graph 1

At the given exchange rate i.e. $0.121, the demand will be more than the supply. This will lead to the appreciation of the Yuan. If the exchange rate were allowed to float more freely, the U.S. dollar price of the exchange rate would move toward the equilibrium exchange rate.

This would occur as a result of the shortage when buyers of the Yuan would bid up its U.S. dollar price.

As the exchange rate increased, the quantity of Yuan demanded would fall while its supply would increase. If the exchange rate were allowed to increase to the eq. exchange rate, the disequilibrium would be eliminated.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.

b)

To determine

To draw: Graph representing exchange rate model showing restriction on foreigners to invest in C.

Explanation of Solution

  

Graph 2

Placing restrictions on foreigners who want to invest in country C would reduce the demand for the Yuan, causing the demand curve to shift in the accompanying diagram from D1 to something like D2. This would cause a reduction in the shortage of the Yuan. If demand fell to D3, the disequilibrium would be completely eliminated.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.

c)

To determine

To draw: Graph representing exchange rate model showing removal of restriction on Chinese to invest abroad.

Explanation of Solution

  

Graph 3

Removing restrictions on Chinese who wish to invest abroad would cause an increase in the supply of the Yuan and a rightward shift of the supply curve.

This increase in supply would reduce the size of the shortage.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.

d)

To determine

To draw: Graph representing the exchange rate model showing the imposing of taxes on C exports.

Explanation of Solution

  

Graph 4

Increasing taxes on exports would increase the prices resulting in a decrease in the demand for Yuan with which to purchase those goods. The graphical analysis here is virtually identical to that found in the figure accompanying part b. (Demand keeps decreasing until it hits the target)

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.