ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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It would not react to a change in the value of the currency
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The quantity of yuan supplied would increase
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The quantity of yuan supplied would decrease
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None of the above
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Detailed explanation-1: -A currency peg is a monetary policy that keeps the value of a currency low compared to other countries. The Chinese yuan has had a currency peg since 1994. The effect of the peg and the low currency is that Chinese exports are cheaper and, therefore, more attractive compared to those of other nations.
Detailed explanation-2: -So far this year, the yuan has slumped more than 13% against the dollar, on track to log its worst year since 1994, when China devalued the yuan by 33% overnight as part of market reforms. A rapid depreciation of the currency can cause fresh headaches for Beijing as it could intensify capital flight.
Detailed explanation-3: -Devaluing Currency A weak domestic currency makes a nation’s exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products.
Detailed explanation-4: -Tighter Covid controls this year, including a two-month lockdown of Shanghai, have prompted many economists to cut their GDP forecasts to near 3%. That economic slowdown has contributed to the weakening yuan, which can help make Chinese exports cheaper to buyers in the U.S. and other countries.