Question

The onset of the Great Recession in the late 2000s had a large negative impact on the growth rate of the Chinese economy, which depended on export expansion. At the time, the government of China decided to shift its economic growth strategy policy away from export orientation and towards a more balanced approach that supports investment in non-tradable sectors as much as tradable sectors. What impact must this policy have had on the real exhange rate of China's yuan?

	a.	The policy change is likely to have had an ambiguous effect on the yuan’s real exchange rate.
	b.	The policy change could not have had any effect on the yuan’s real exchange rate.
	c.	The policy change must have lowered the yuan’s real exchange rate.
	d.	The policy change must have raised the yuan’s real exchange rate.

Answer 1

Option D.

As investment in non tradable sectors in China will increase, this will lead to increase in demand for Chinese currency or Yuan because capital inflow will occur and thus in the foreign exchange market, the demand for Yuan will increase leading to appreciation of real exchange rate of China. Thus, the policy change ust have raised the yuan's real exchange rate.