(from the WSJ Macro Weekly Review)
by: Kathy Chen and Jason Dean Feb 18, 2010
SUMMARY: The U.S. is expected to press China in the coming months over what officials see as an undervalued
yuan.
CLASSROOM APPLICATION: This article can be used for a discussion of the mechanics of exchange rate intervention
as well as the costs and benefits of maintaining a fixed or managed exchange rate.
QUESTIONS:
1. According to U.S. officials, China's yuan is undervalued. What does it mean for a currency to be undervalued?
2. Describe the mechanism by which the Chinese government maintains an undervalued currency.
3. What are the economic advantages to China of maintaining an undervalued currency? What are the
economic disadvantages?