Recently, Americans have been enjoying many products from China, as evidenced by China being the primary source of American imports. American exports to China have not grown as rapidly. If the U.S. dollar - Chinese yuan exchange rate was free to fluctuate, we would expect that the American dollar would ____ relative to the Chinese yuan. To maintain the target exchange rate, the Chinese have ____ dollars.
A) appreciate; bought
B) appreciate; sold
C) depreciate; bought
D) depreciate; sold
E) not change; not bought or sold

Question

Quizplus · Accepted Answer

If the U.S. dollar was free to fluctuate, it would depreciate relative to the Chinese yuan because Americans are buying more Chinese products than Chinese are buying American products. Therefore, American demand for Chinese yuan to purchase these products would increase, driving up the value of the yuan and lowering the value of the dollar. To maintain the target exchange rate, the Chinese central bank would need to buy dollars and sell yuan, increasing their supply of yuan and decreasing their supply of dollars. This would push the exchange rate back towards the target rate.

Recently, Americans Have Been Enjoying Many Products from China, as Evidenced