Part A Chinese Currency Undervaluations
CHOSE Topic 2: Chinese currency undervaluation
Background Donald Trump repeatedly accused China of deliberately keeping its currency, the Renminbi, undervalued in order to boost economic growth.
Task Analyse how the People’s Bank of China has kept the Renminbi undervalued. What are the costs and benets associated with its undervaluation strategy? Conclude by analysing the extent to which the Chinese currency is still undervalued today.
part B 1 and 2
Question B.1: Ecuador and USA (mandatory)
(a) Ecuador struggles with a high level of government debt and large budget decits. In early 2019, the International Monetary Fund granted further access to nancing. Additional credits, however, were only granted subject to implementation of austerity measures. Complying with this condition, Ecuador has reduced government spending substantially. First, use the IS-LM-FX model to show how you would expect output and exchange rate to evolve in Ecuador as a result of these government spending cuts. Second, assume that the same austerity measures had been implemented in neighbouring Peru (rather than Ecuador). Do you think that the eect on Peruvian output would have been stronger or weaker compared to the Ecuadorian situation? Explain.1 (55 marks)
(b) Can you explain the following statement? The strong US dollar renders increasing Ecuadorian competitiveness more dicult. (25 marks)
(c) Why is the cost of borrowing for the USAcompared to other countriesvery stable and largely independent of its domestic growth performance? (20 marks) Maximum number of words for Question B.1: 400 words.
Question B.2: Central Banks
(a) Interpret the following statement: By not joining the eurowhile simultaneously making it clear that it will never, never change the parity with the eurothe Danish Central Bank undermines its own peg. (30 marks)
(b) Recently, a newspaper headline stated “Hong Kong protests could break peg against the US dollar”. Outline the argument underlying this statement? Contrary to the headline, however, the peg has not come under threat. Can you explain why? (40 marks)
(c) Whenever Donald Trump tweets about Mexico-related topics, the Mexican peso depreciates relative to the USD. Typically, a depreciation is expected to increase exports and boost growth. Nevertheless, the Mexican Central Bank often intervenes after Trump’s tweets to stabilise (appreciate) the currency. Can you explain why? (30 marks)
