Macroeconomics 11th Edition by Michael Parkin

Exercise 6

Exchange Rate Policy
Use the following news clip to work Problem.
U.S. Declines to Cite China as Currency Manipulator
The Bush administration has declined to cite China for manipulating its currency to gain unfair trade advantages against the United States. America's growing trade deficit with China, which last year hit an all-time high of $256.3 billion, is the largest deficit ever recorded with a single country. Chinese currency, the yuan, has risen in value by 18.4 percent against the U.S. dollar since the Chinese government loosened its currency system in July 2005. However, American manufacturers contend the yuan is still undervalued by as much as 40 percent, making Chinese products more competitive in this country and U.S. goods more expensive in China. China buys U.S. dollar-denominated securities to maintain the value of the yuan in terms of the U.S. dollar.
What was the exchange rate policy adopted by China until July 2005Explain how it worked. Draw a graph to illustrate your answer.