As mentioned in the chapter, Hong Kong has a currency board that fixes the exchange rate between the U.S. and H.K. dollars.
a. What is the likely consequence of a large capital inflow for the rate of inflation in Hong Kong? For the competitiveness of Hong Kong business? Explain.
b. Given a large capital inflow, what would happen to the value of the Hong Kong dollar if it were allowed to freely float? What would be the effect on the competitiveness of Hong Kong business? Explain.
c. Given a large capital inflow, will Hong Kong business be more or less competitive under a currency board or with a freely floating currency? Explain.