Consider the market for Chinese currency yuan.Suppose that the initial equilibrium exchange rate was $0.125 per one yuan.Then assume that American consumers like Chinese products more than before.If China's central bank wants to peg the exchange rate at its initial level $0.125 per yuan,the central bank will have to

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Quizplus · Accepted Answer

If China's central bank wants to peg the exchange rate at its initial level of $0.125 per yuan, it would have to increase the supply of yuan in the foreign exchange market, which would lower the exchange rate. So, to maintain the peg, the central bank would need to sell yuan and buy dollars in the foreign exchange market. This would increase the demand for yuan and decrease the supply of dollars, which would push the exchange rate back up to $0.125 per yuan. Therefore, the correct answer is option B- sell yuan and buy dollars.

Consider the Market for Chinese Currency Yuan