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What is the impact of the pbc policy of foreign currency

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Reference no: EM132550810

China has a trade surplus and the People's Bank of China (PBC, China's central bank) purchases all the excess foreign currency earning of the country's exporters. This policy is equivalent to bond purchases by the PBC through open market operations.

a) What is the impact of the PBC's policy of foreign currency purchase on the country's money supply?

b) If all foreign conditions are exogenous and the aggregate real income, the price level, and the future conditions of the Chinese economy (including the expected exchange rate) can be taken as given, what is the consequence of the policy for the current interest rate and the spot exchange rate in China?

Reference no: EM132550810

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