Draw a diagram, similar to Figure 19-10, representing the foreign exchange situation of China when it kept the exchange rate fixed. (Hint: Express the exchange rate as U.S. dollars per yuan.) Then show with a diagram how each of the following policy changes might eliminate the disequilibrium in the market.

a. An appreciation of the yuan

b. Placing restrictions on foreigners who want to invest in China

c. Removing restrictions on Chinese who want to invest abroad

d. Imposing taxes on Chinese exports, such as shipments of clothing, that are causing a political backlash in the importing countries.

Figure 19-10

Transcribed Image Text:

Exchange rate (U.S. dollars per geno) US$1.50 Target exchange rate 0 (a) Fixing an Exchange Rate Above Its Equilibrium Value Surplus at exchange rate of US$1.50 per geno E D Quantity of genos In both panels, the imaginary country of Genovia is trying to keep the exchange rate of the geno fixed at US$1.50 per geno. In panel (a), the equilibrium exchange rate is below $1.50, leading to a surplus of genos on the foreign exchange market. To keep the geno from falling below $1.50, the Genovian Exchange rate (U.S. dollars per geno) US$1.50 Target exchange rate 0 (b) Fixing an Exchange Rate Below Its Equilibrium Value Shortage at exchange rate of US$1.50 per geno S D Quantity of genos government can buy genos and sell U.S. dollars. In panel (b), the equilibrium exchange rate is above $1.50, leading to a shortage of genos on the foreign exchange market. To keep the geno from rising above $1.50, the Genovian government can sell genos and buy U.S. dollars.