Consider the USD/CNY FX market, where CNY is the Chinese currency, Yuan. Assume that China is operating a fixed exchange rate system. Suppose that there is an increase in Chinese exports to the U.S.A.

a. If the Peoples Bank of China (PBC), the Chinese central bank, wants the exchange rate to stay at its target level, how should it intervene in the FX market? (Indicate which currency PBC buys and which it sells.)

b. What are the Chinese balance of payments entries for PBCs FX market intervention? Assume that PBC is providing US importers with the necessary CNY and that, in the same period, US importers use the CNY to buy Chinese goods. Whats the credit, whats the debit, and in which (sub-)accounts do they go?

	DEBIT (-)	CREDIT (+)
Current Account
Capital Account
OSA

c. Does the FX market intervention increase or decrease the following?

Chinese holdings of official reserve assets

Chinese money supply

d. Assume that China continues to operate a fixed exchange rate system. Which of the following are part of an adjustment mechanism that might follow the repeated FX market interventions by the Chinese central bank and might ultimately bring CA+KA, i.e., the sum of current and capital account balances, back to zero? Circle all that apply:

Chinese price level rises

Chinese price level falls

Chinese (real) interest rates rise

Chinese (real) interest rates fall

e. How could the Chinese state (i.e., PBC, other regulators, or state owned enterprises (SOEs)) accommodate the export-related demand for CNY at the fixed exchange rate without changing the money supply (i.e., the amount of CNY in circulation)? State two specific measures that the state could consider?