In 1994, China sought to boost its foreign exchange reserves and stabilize the yuan (which was under pressure to appreciate) by mandating that Chinese enterprises sell all their foreign exchange to the country’s commercial banks. The People's Bank of China, in turn, was forced to buy surplus foreign exchange with yuan.

a. What are the likely consequences of this policy for China’s rate of inflation? Explain.

b. What alternatives are open to China to achieve its attempt to simultaneously hold down the value of the yuan and curb inflation?