yee Suppose China exports TVs and uses the yuan as currency, whereas Russia expo
ID: 2506722 • Letter: Y
Question
yee
Suppose China exports TVs and uses the yuan as currency, whereas Russia exports vodka and uses the rubble. China has a stable money supply and slow technological progress in production, while Russia has very rapid growth in the money supply and no technological progress in vodka production. Based on this information what would you predict for the real exchange rate (measured as bottles of vodka per TV) and for the nominal exchange rate (measured as rubbles per yuan)? Hint: For the real exchange rate note that as a consequence of technological progress the cost of making a TV goes down over time in China.Explanation / Answer
The Case for Floating Exchange Rates
The main arguments for adopting a floating exchange rate system are as follows:
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