Study the following extract and answer the questions that follow. Trade war with the United States puts pressure on China's currency As a trade war between the United States (US) and China worsens, a central bank official has said that China will not use its currency to deal with trade conflicts and will continue with the market-based reforms of its exchange rate system. In the past, the US has accused China of being a currency manipulator that has maintained a fixed exchange rate to keep the renminbi (RMB, China's currency) undervalued. According to a US trade official, \"a depreciating currency is good for the Chinese economy\". The value of the renminbi has fallen 9 % against the US dollar (US$) in the past six months. Expansionary domestic monetary policy, concerns about economic growth and an escalating trade war continue to put downward pressure on the renminbi. Allowing the value of the renminbi to fall suggests that the central bank is currently maintaining a managed exchange rate rather than a fixed peg to the US dollar. The cause of the lower value of the renminbiaside from a slowdown in Chinese economic growthis a shrinking current account surplus. The US has imposed tariffs on US$250 billion worth of Chinese imports. The US president has also threatened to impose tariffs on the remaining imports from China. This, along with a widening trade deficit in services, caused mainly by the rise in Chinese tourists travelling abroad, would further reduce China's current account surplus. In 2017, China's current account surplus was 1.6 % of gross domestic product (GDP). By the first quarter of 2018, the surplus became a small deficit. There is international concern about the potential damage that a prolonged trade war with the US could cause to the Chinese economy. Central bank officials in China are concerned about the depreciating currency but are trying to avoid central bank intervention. To support the export sector, the Chinese government is considering measures such as subsidies and exemptions from some indirect taxes. These measures, along with a falling renminbi will allow Chinese exporters to avoid passing on some of the tariff costs to US consumers. To complicate matters for China, economic growth in the US is causing US interest rates to rise and the US dollar to strengthen. This, along with China''s first current account deficit in 20 years, is negatively affecting China's financial account. Responding to the rising US interest rates with increases of its own is not a good option for China's central bank, because Chinese companies have a heavy debt burden that is slowing economic growth. Recently, a government official advised against increasing China's interest rate because of its impact on borrowing costs in China. (a) (i) Define the term fixed exchange rate indicated in bold in the text (paragraph 1). [2 marks] (ii) Define the term monetary policy indicated in bold in the text (paragraph 2). [2 marks] (b) Explain how \"increasing China's interest rate\" could affect its economic growth (paragraph 5). (Economic graph is recommended. Hint: AD/ AS diagram [4 marks] (d) Using information from the text/data and your knowledge of economics, discuss the view that a depreciating currency is good for the Chinese economy. [8 marks] Mark Scheme for the Assignment / Rubric Define the term fixed exchange rate indicated in bold in the text (paragraph @). [2] The work does not meet a standard described by the descriptors below. Vague definition. The idea that a country's currency is fixed by the government (central bank). Accurate definition. An explanation that a currency's (value) is fixed against any one of the following: the value of another currency + a basket of other currencies e gold + fixed by the central bank of a country, and is not permitted to change in response to changes in currency supply and demand. (i) Define the term monetary policy indicated in bold in the text (paragraph @). The work does not meet a standard described by the descriptors | 0 below 1 An explanation that it is any two of the following: + demand-side policy + changes in interest rates changes in money supply * changes in quantitative easing. (c) Using an AD/AS diagram, explain how \"increasing China's interest rate\" could affect its economic growth (paragraph @). The work does not meet a standard described by the descriptors below. There is a correct diagram OR an accurate written response. For an AD/AS diagram showing a shift of AD to the left and a decrease in real GDP OR for an explanation that a rise in interest rates may cause an increase in borrowing costs leading to a decrease in the consumption or investment components of aggregate demand, thus bringing about a decrease in real GDP (growth). There is a correct diagram AND an accurate written response. For an AD/AS diagram showing a shift of AD to the left and a decrease in real GDP AND for an explanation that a rise in interest rates may cause an increase in borrowing costs leading to a decrease in the consumption or investment components of aggregate demand, thus bringing about a decrease in real GDP (growth). Candidates who incorrectly label diagrams can be awarded a maximum of [3]. For AD/AS the vertical axis may be average (general) price level, APL or price level. For the horizontal axis, real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary. Average Price Level Real GDP Using information from the text/data and your knowledge of economics, discuss the view that a depreciating currency is good for the Chinese economy. Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. Do not award beyond Level 2 if the answer does not contain reference to the information provided. jLevel | 000000 [ Marks | 7 Few relevant concepts are recognized. 1-2 There is basic knowledge/understanding. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is some attempt at application/analysis. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is effective application/analysis. There is synthesis/evaluation, supported by appropriate theory and evidence. \"Discuss\" requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence. Responses may include: definitions of depreciation, managed exchange rate. Economic analysis may include: Marshall-Lerner and J curve AD /AS exchange rate theory balance of payments government macroeconomic objectives. Arguments supporting the claim may include: increased AD by decreasing relative price of exports, increasing export revenue if X PED>1 increases relative price of imports, decreasing import expenditure if M PED=>1 increasing export revenue increases current account surplus (paragraph ) increase in net export component of AD leading to increasing economic growth (paragraph @) increases in foreign exchange reserves (assuming export revenue is increasing and is greater than import expenditure) increases Chinese ownership of foreign assets and foreign debt China exports to countries other than the US protects Chinese exporters from US tariff costs (paragraph @). Arguments against the claim may include: the claim that the depreciating RMB is good for the Chinese economy is made by a US official who may be justifying the punitive US tariff regime (paragraph 0) depreciation of the RMB could compromise the market-based reforms to the exchange rate (paragraph @) main cause of depreciation is \"shrinking current account surplus\" caused by trade war falling demand for the RMB (paragraph ) normal benefits of depreciating currency (lower relative price of exports) cancelled out by US tariffs hence no increase in export revenue on current account (paragraph ) depreciation increases relative import prices therefore increasing import expenditure (\"widening trade deficit\") and reducing the current account surplus increasing supply of Renminbi (paragraph ) export sector needs government help to compete as depreciation not sufficiently offsetting effect of US tariffs (paragraph @) depreciation will increase relative price of imported components therefore decreasing SRAS slower economic growth due to lower net export component causing slowdown in AD rising US interest rates could lead to capital flight from China (paragraph ) depreciating currency could cause capital flight as speculators seek out the strengthening US dollar therefore \"negatively affecting China's financial account\" (paragraph ) indebted Chinese firms harmed if interest rates rise to support the Renminbi and prevent capital flight (paragraph ) depreciating exchange rate tends to cause political tensions with US (China's biggest trade partner). Any reasonable discussion