A country has a fixed exchange rate when the government keeps the exchange rate against some other currency at or near a particular target. In the early years, to keep its rate fixed, China had to engage in large scale market intervention, selling yuan, buying up other countries' currencies (mainly US dollars) on the foreign exchange market, and adding them to its reserves.

Draw a diagram, representing the foreign exchange situation of China when it kept the exchange rate fixed. Express the exchange rate as US dollars per yuan. Then show with a diagram how each of the following policy changes will eliminate the disequilibrium in the market.

a)China no longer fixes its exchange rate and allows it to float freely.

b)Placing restrictions on foreigners who want to invest in China.

c)Removing restrictions on Chinese who want to invest abroad.

d)Imposing taxes on Chinese exports, such as shipments of clothing, that are causing a political backlash in the importing countries.

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