The Chinese government purchased U. S. dollars in the foreign exchange market with Chinese currency. During the same period, the Chinese sharply raised the reserve requirement on banks because they wanted to prevent the money supply from expanding too rapidly. The effect of the Chinese government's purchase of U. S. dollars in the foreign exchange market with Chinese currency would be to

Question

Joselyn Ward

Business

26 January, 18:36

The Chinese government purchased U. S. dollars in the foreign exchange market with Chinese currency. During the same period, the Chinese sharply raised the reserve requirement on banks because they wanted to prevent the money supply from expanding too rapidly. The effect of the Chinese government's purchase of U. S. dollars in the foreign exchange market with Chinese currency would be to

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Answers (1)

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Branden Webster · Answer 1

The value of the US dollar would go up whilst that of the Chinese currency would decrease.

Explanation:

This would be as a result of the market forces of demand and supply, by buying the US dollar the demand for USD would be increasing on the market and therefore the value/price would increase to meet this demand. The Chinese currency would reduce in value because of the excess supply of it on the market, by buying USD with Chinese currency it would flood the foreign exchange market with Chinese currency. However this would be mitigated to some extent by the increase in reserves.