Question

answer the question

1. On a supply-demand graph, show what would happen to the Chinese Yuan if inflation in the U.S. increased relative to China.

2. On a supply-demand graph, show what would happen to the Chinese Yuan if interest rates in the U.S. decreased relative to China.

3. On a supply-demand graph, show what would happen to the Chinese Yuan if income levels in the U.S. decreased.

4. On a supply-demand graph, show what would happen to the Chinese Yuan if the U.S. imposed a tariff on imports from China.

5. On a supply-demand graph, show what would happen to the Chinese Yuan if investors had expectations that interest rates in the U.S. are going to increase relative to China.

6. Explain why the British pound and the Euro might be correlated overtime when compared to the U.S. dollar.

7. Which two of the following currencies are most likely to move together: Euro, Thai Baht, U.S. dollar, New Zealand Dollar, India Rupee, Australian Dollar.

8. Explain your thinking from problem 7.

9. The AUD was priced at $1.32 in September 2013. In September 2012, the price of the AUD was

$1.44. In September 2011, the price of the AUD was $1.22. What is the percent change in the AUD from 2011 to 2012? What is the percent change in the AUD from 2012 to 2013?

Answer 1

1. Due to higher inflation in the US, the demand for Yuan will increase because US citizens will demand more of Chinese goods and services since they are now relatively cheaper. This will shift the demand curve for Chinese Yuan to the right from D1 to D2. The new equilibrium is given by e2. As a result, Chinese yuan appreciate while Dollar depreciate.

2. Due to decrease on interest rate in US, the capital will flow out of US into China. People will want to earn higher return on their capital investment by investing in China. As a result the demand for Chinese Yuan increases and shifts demand curve to the right from D1 to D2. The new equilibrium is given by e2. There will be Chinese yuan appreciation while Dollar depreciate.

3. If the income level falls in the US, then there will be fall in the demand for Chinese goods as a result the demand for Chinese Yuan falls and the demand curve shifts left from D1 to D2. The new equilibrium is given by e2, where, Yuan depreciate and Dollar appreciate.

4. If the US imposes a tariff on imports from China. This means that the imports are now expensive relative to the domestically produced goods in the US. People shift there consumption towards the domestically produced goods in US and the imports demand falls in US. This reduces the demand for the Chinese currency, Yuan. The demand for Chinese currency shifts to the left from D1 to D2. As a result, Yuan depreciate and Dollar appreciate. The new equilibrium is given by e2.