Question

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 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 increases Chinese exports to the U.S. and decreases U.S. exports to China, increasing the U.S. trade deficit with China. OB. It decreases Chinese exports to the U.S. and increases U.S. exports to China, increasing the U.S. trade deficit with China. OC. It decreases Chinese exports to the U.S. and increases U.S. exports to China, increasing the U.S. trade surplus with China. OD. It increases Chinese exports to the U.S. and decreases U.S. exports to China, increasing the U.S. trade surplus with China.

Answer 1

a) This means that the Chinese currency is "undervalued" relative to dollar and thus Chinese manufacturers have a big advantage against foreign firms because they can export more at a cheaper price (don't have what will be filled in the blanks)

b) It affects the balance of trade by increasing the Chinese exports to the US and decreasing the US exports to China, increasing US trade deficit with China. The answer is "A".