Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, that should reduce the U.S. balance-of-trade deficit with China.

Question

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If the Chinese yuan appreciates against the dollar, Chinese goods become more expensive for U.S. firms to buy. This may cause them to switch to purchasing supplies from U.S. firms instead, which would reduce the amount of goods imported from China and thereby reduce the U.S. balance-of-trade deficit with China.

Assume That Some U