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• China maintained a fixed exchange rate between the renminbi (RMB) yuan and the
U.S. dollar for a long time.
– The RMB floated between 2005 and 2008 and then again starting in 2010.
• There is mounting pressure from China’s trading partners for a stronger RMB.
Supply (S)
$1.60
Dollar depreciates (flexible
regime)
$1.40
Demand (D)
Trade deficit
QS QD = QS QD Q of €
Copyright © 2014 by the McGraw-Hill Companies,
Inc. All rights reserved. 2-38
Fixed versus Flexible Exchange Rate Regimes
policies
(fixed regime)
$1.40
Demand (D)
Demand (D*)
QD* = QS Q of €
Copyright © 2014 by the McGraw-Hill Companies,
Inc. All rights reserved. 2-40