China fixes its exchange rate (yuan per units of foreign currency)at a rate above its free-market equilibrium level.In order to maintain this exchange rate,and to prevent its currency from ________,the Chinese central bank must be accumulating ________.

Question

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When a country fixes its exchange rate at a rate above its free-market equilibrium level, its currency becomes overvalued and prone to appreciation. To prevent appreciation, the central bank must be accumulating foreign-exchange reserves by buying foreign currencies in exchange for its domestic currency. This increases the demand for foreign currencies, thus preventing appreciation and maintaining the fixed exchange rate.

China Fixes Its Exchange Rate (Yuan Per Units of Foreign