Suppose market forces outside of the control of the Chinese government are causi

Question

Suppose market forces outside of the control of the Chinese government are causing the price of Chinese yuan in terms of Japanese yen to rise. In order to maintain the current value of the yuan, the Chinese government must: a. file a pegging application with one of the three international currency-management agencies. b. ban Chinese firms from hiring Japanese workers. c. using tax incentives, encourage Chinese firms to hire more Japanese workers. d. get official approval from the World Trade Organization. e. buy yen with newly created yuan.

Explanation / Answer

Option (e).

To maintain current value of Yuan, Chinese government must lower the value of Yuan relative to Yen. To do that, government should buy Yen (which will raise the demand for Yen, causing Yen to revalue) in lieu of newly created Yuan (which will raise the supply of Yuan, causing Yuan to devalue).

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