Question 5 [10 marks] Parts a-f. How does China control exchange rates? Unlike many of its international trade partners [who allow the values of their currencies to oat freely against others], China has a strictly controlled currency policy where it regulates trading activity and tries to control daily movements of the Yuan {Chinese currency} on the foreign exchange market. China has customarily used a portion of its reserves to influence the value of its currency through foreign exchange market intewentions. To strengthen the Yuan, the Chinese central bank sells foreign currency reserves {typically dollars] into the market. On the other hand, if the country wants to weaken its currency, it uses its local currency to buy foreign currency. By contrast, in 1933 the newly elected Labour government, with Bob Hawke as Prime Minister and Paul Keating as h=eTreasurer moved the Australian dollar onto a oating exchange rate. This meant that the dollar was now valued through the supply and demand of money within world currency markets. a. An exchange rate is the of one country's currency in terms of another country's currency. [1 mark] b. An exchange rate is necessary because one country's currency is not in another country for international trade. [1 mark] c. The exchange rate is determined through the forces of .............and ......... E . [1 mark]