If China were to adopt a floating exchange-rate regime, it would:
A) cause the Chinese trade balance to fall.
B) cause the U.S. trade balance with China to fall.
C) force the U.S. to adopt a fixed exchange rate to maintain the balance of trade.
D) de-stabilize the entire world economy.

Question

Quizplus · Accepted Answer

If China were to adopt a floating exchange-rate regime, it would cause the value of China's currency, the yuan or renminbi, to be determined by supply and demand in the foreign exchange market. This would lead to changes in the exchange rate, making imports more expensive and exports less expensive. As a result, the trade balance, which is the difference between exports and imports, would likely fall. This is because a stronger currency makes imports cheaper and exports more expensive, leading to higher imports and lower exports.

If China Were to Adopt a Floating Exchange-Rate Regime, It