Question

Briefly how exchange rate are determined by supply of demand.

Explain how the government maintains the value of its currency fixed with a foreign currency through buying and selling of reserves.

Donald Trump official labeled China a "currency manipulator" in August 2019 (see the attached article from the New York Times). Based on what we have discussed with regard to the determination of exchange rates, what impact did this likely have in the market for Chinese Yuan (renmimbi)? Do you believe that these threats are effective at achieving the goal of a stronger Yuan? Explain.

Answer 1

The supply and demand in the foreign market determine the exchange rate. The price of domestic currency also determines the exchange rate. When the demand for foreign currency increased with the appreciation of the foreign currency will shift the demand curve to right. This will leads to the rise in exchange rate. If the domestic interest rate increased, the foreign exchange rate will fall down. This will depreciate the value of domestic currency. The other factors which determine the tax rates are inflation, growth rate and government restrictive policies. The government tried to fix the exchange rate to maintain their economic sustainability. The fixed exchange rate will avoid the fluctuation of exchange rate in the foreign market. The fixed exchange rate determines value of currency with respect to the stability of inflation, exchange rate and the price level.
China is one of the most vibrant country in the international market. They will export large amount of machines and other raw materials to other countries. China is following fixed exchange rate to avoid market fluctuations. But in another developed countries they used floating exchange rate. The strict rules were used by the central bank will avoid the fluctuations in the market. China used a portion of its reserves to influence the value of its currency through foreign exchange market interventions. Through this China strengthen the value of Yuan. The use of derivative contracts on the market will influence the value of currency. The government alter the reserve requirements in the domestic banking system to freeing up the money supply in the market.