Solutions 2 - FIN 330 Suggested Answers for"A Yen for a...

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1 FIN 330 Suggested Answers for “A Yen for a Yuan” 1. Why is China trying to hold down the value of the yuan? What evidence suggests that China is indeed pursing a weak currently policy? ANSWER . China believes that it needs to export in order to keep people employed and provide jobs, as state enterprises become obsolete and close down. The government worries that a large body of unemployed people would lead to unrest. Evidence that a weak yuan policy is being pursued shows up in the peg to the dollar being maintained despite the weakening of the dollar. The existence of the peg is evident from the fixed exchange rate and the large quantity of dollars the government is buying up to support the dollar against the yuan (as seen in the jump in China’s foreign exchange reserves in recent years). 1. What benefits does China expect to realize from a weak currency policy? ANSWER . China hopes that flourishing export businesses will be able to absorb newly unemployed people from state enterprises that are being shut down. In addition, a perceived potential deflation can be averted by maintaining a weak yuan (which raises the price of foreign goods) and expanding the yuan money
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This note was uploaded on 04/07/2008 for the course FIN 330 taught by Professor Chaocharhhia during the Fall '07 term at University of Miami.

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Solutions 2 - FIN 330 Suggested Answers for"A Yen for a...

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