Question

options:

- ... yuan is .... (overvalued / undervalued) relative to the dollar,...

- .... because (Chinese goods are inexpensive overseas / foreign goods are inexpensive in China)

According to a newspaper story: "China's critics contend that the yuan's exchange rate of slightly more than 8 yuan per dollar... is far out of line with market forces and gives Chinese manufacturers a big advantage against foreign firms, adding to the enormous U.S. trade deficit and China's burgeoning trade surplus. Paul Blustein, "U.S. Urges IMF Crackdown on Currency" Washington Post, September 24, 2005. To say that the yuan's exchange rate was "far out of line with market forces means that the yuan is relative to the dollar, and thus Chinese relative to the dollar and the Chin manufacturers have a "big advantage against foreign firms" because How does the yuan exchange rate affect the balance of trade in the United States and China? O A. It decreases Chinese exports to the U.S. and increases U.S. exports to China, increasing the U.S. trade deficit with China. B. It increases Chinese exports to the U.S. and decreases U.S. exports to China, increasing the U.S. trade deficit with China OC. It increases Chinese exports to the U.S. and decreases U.S. exports to China, increasing the U.S. trade surplus with China. O D. It decreases Chinese exports to the U.S. and increases U.S. exports to China, increasing the U.S. trade surplus with China. Click to select your answer. 2 AAK

Answer 1

To say that the Yuan's exchange rate was far out of line with the market forces means that the yuan is "undervalued" relative to the dollar. that gives a big advantage against foreign firms because "Chinese goods are inexpensive overseas".

a) Because of Yuan being undervalued "it increases the Chinese exports to the US and decreases US exports to China increasing the US trade deficit. " The answer is "B".