Trade and labor mobility Suppose that the U.S. dollars-Chinese yuan exchange rat

Question

Trade and labor mobility

Suppose that the U.S. dollars-Chinese yuan exchange rate is fixed by the U.S. and Chinese governments. Assume also that labor is immobile between the United States and China due to high transportation costs.

Which of the following situations is likely to happen as a result of a simultaneous increase in the demand for U.S. goods and decrease in the demand for Chinese goods?

a. The U.S. unemployment rate increases, and the country undergoes bad economic times for a sustained period.

b. The Chinese unemployment rate rises at first, but it soon drops as unemployed Chinese move to the United States for employment.

c. The Chinese unemployment rate rises at first, but then it drops as Chinese yuan depreciate against U.S. dollars.

d. The Chinese unemployment rate increases, and the country undergoes bad economic times for a sustained period.

Explanation / Answer

1. Since exchange rate is fixed and labor is immobile we get that answers 'b' and 'c' are irrelevant to this question and this context.

Again answer 'a' explains an opposite logic, since if a simultaneous increase in the demand for U.S. goods and decrease in the demand for Chinese goods occurs, means that US will be employing more in order to produce more to meet the demand , whereas for China answer 'd' takes place. Hence answer 'd' is the correct option.

d. The Chinese unemployment rate increases, and the country undergoes bad economic times for a sustained period.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.