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Chapter 19: Q.10 (page 528)

What are some of the disadvantages of China鈥檚 pegging the yuan to the dollar?

Short Answer

Expert verified

The disadvantage of China's pegging the Yuan to the dollar is that China can not pursue its own independent monetary policy and use it to retort to domestic shocks that are independent of these hitting the anchor country.

Step by step solution

01

Concept Introduction

Pegging refers to the monetary policy or strategy that has targeting the worth or fixing the worth of the domestic currency to the foreign currency similar to the gold standard. The changes within the value of the foreign currency will influence similar change within the targeted or domestic currency.

02

Explanation of Solution

Another disadvantage of pegging is that it'll leave hospitable speculative attacks on China's currency. Same changes would happen to the China's currency because it will happen to the U.S. Another disadvantage of pegging is that it can weaken the accountability of policymaker, particularly in emerging market countries among which China is additionally one. It emphasis the fixed rate system and benefits of fluctuate exchange system can't be achieved.

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Most popular questions from this chapter

Suppose that you travel to Cali (Colombia), where the exchange rate is1USDto2,900Colombian pesos. As you enter a McDonald鈥檚 restaurant, you realize you need 17,400Colombian pesos to buy a Big Mac. Assuming a Big Mac sells for $5in the United States, would you say that the Colombian peso is over- or undervalued in terms of PPP?

Why is it that in a pure, flexible exchange rate system, the foreign exchange market has no direct effect on the money supply? Does this mean that the foreign exchange market has no effect on monetary policy?

Under the gold standard, if Britain became more productive relative to the United States, what would happen to the money supply in the two countries? Why would the changes in the money supply help preserve a fixed exchange rate between the United States and Britain?

What would be the effect of a devaluation on a country鈥檚 imports and exports? If a country imports most of the goods included in the basket of goods and services used to calculate the CPI, what do you think the effect will be on this country鈥檚 inflation rate?

24. Suppose the Mexican central bank chooses to peg the peso to the U.S. dollar and commits to a fixed peso/ dollar exchange rate. Use a graph of the market for peso assets (foreign exchange) to show and explain how the peg must be maintained if a shock in the U.S. economy forces the Fed to pursue contractionary monetary policy. What does this say about the ability of central banks to address domestic economic problems while maintaining a pegged exchange rate?
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