Quiz 2 - Therefore, China may want to peg their currency to...

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If the Euro appreciates against the U.S dollar, it means that the value of Euro has increased relative to the U.S. dollar. (Therefore it takes fewer Euros to buy a dollar). This also means that the Euro can purchase more U.S. goods. The prices of U.S. items basically become cheaper in Europe. Similarly, if the U.S. dollar is depreciating against the Euro, it is losing value. So one dollar buys less Euros and the price of European goods go up in the United States. The benefit of pegging an exchange rate is to circumvent the disadvantages of flexible exchange rates.
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Unformatted text preview: Therefore, China may want to peg their currency to the U.S Dollar simply to circumvent the disadvantages of flexible exchange rates. If the U.S and China use currency interventions such as reserves or if they try to control the flow of trade and finance directly, they may be able to maintain exchange rates. This in turn would mean that as the Dollar appreciates against other countries, so will the Chinese currency against other currencies. Therefore, other countries would have to pay or trade more for the same amount of Chinese (or American) exports....
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