Suppose the Chinese central bank wants to keep the exchange rate of its currency value constant over time. An increase in the demand for Chinese goods by American residents will lead the Chinese central bank to

Question

Quizplus · Accepted Answer

An increase in the demand for Chinese goods by American residents will lead to an increase in demand for Chinese currency, which will put upward pressure on the exchange rate of the Chinese currency. To maintain the exchange rate constant, the Chinese central bank needs to sell Chinese currency in exchange for U.S. dollars in the foreign exchange market. This will increase the supply of Chinese currency, which will offset the increase in demand and keep the exchange rate constant. Therefore, the best choice is D, which involves selling Chinese currency in exchange for U.S. dollars.

Suppose the Chinese Central Bank Wants to Keep the Exchange