Question

Consider only two countries, China and the United States. China pegs the yuan to the dollar. As a result, China’s__________ increase, which causes ________ in aggregate demand and a higher level of real GDP.

Answer 1

net exports; increase

Step-by-step explanation:

A currency peg means to stabilize the exchange rate between two countries. Currency peg is the country's exchange rate policy where it attaches the rate of exchange of that country to the other country's script.

In the context, when China pegs its currency Yuan to the U.S. dollar, the real wages will fall in China while the inflation rate rises and hence the current account of China increases.

As a result, the net exports of China increases which increases the aggregated demand in the real GDP.

Therefore the answer is ---

net exports; increase