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4. China fixes the exchange rate of RMB is fixed in terms of USD. Examine the effect of a depreciation of the RMB on the USD value of the following (for simplicity, consider only the effect of relative price changes, ignoring general equilibrium effects) (10%): a. Imports b. Exports c. Trade balanced

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Answer #1

1. Since RMB depreciated on the USD, this means USD became more expensive. This implies imports to become costlier. Hence Imports will decline.

2. Now because RMB has depreciated this means, for foreigners, chinese products have become cheaper. So, foreigners (having USD) will purchase more from China. Hence exports of china will increase.

3. Trade balance = exports - imports.

Since exports have increased, imports have declined. Therefore Trade balance will increase.

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