Check Your Understanding

1. Question

   Draw a diagram, similar to Figure 43.1, representing the foreign exchange situation of China when it kept the exchange rate fixed at a target rate of $0.121 per yuan and the market equilibrium rate was higher than the target rate. Then show with a diagram how each of the following policy changes might eliminate the disequilibrium in the market.

   1. allowing the exchange rate to float more freely

   2. placing restrictions on foreigners who want to invest in China

   3. removing restrictions on Chinese who want to invest abroad

   4. imposing taxes on Chinese exports, such as clothing

2. Question

   In the late 1980s, Canadian economists argued that the high interest rate policies of the Bank of Canada weren’t just causing high unemployment—they were also making it hard for Canadian manufacturers to compete with U.S. manufacturers. Explain this complaint, using our analysis of how monetary policy works under floating exchange rates.