a. 2. (40 marks) What is uncovered interest rate parity? b. In the 2000s, the interest rate in China was higher than that in the U.S. most of the time while the RMB exchange rate was either fixed or gradually appreciating against USD. How did China maintain its monetary policy independence? What are the difficulties involved? Trillions of renminbi 4.5 4.0 14-quarter change in foreign exchange reserves 14-quarter change in monetary base 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1995 1998 2001 2004 2007 2010 Source: International Monetary Fund/International Financial Statistics, from Bordo, MD, OF Humpage and, AJ Schwartz (2012a), Epilogue: Foreign Exchange Market Operations in the Twentieth Century", NBER Working Paper w17984