Question

A 2004 Wall Street Journal article reported, 'Chinese Are Losing Dollar Faith.' It stated, 'From black marketeers to anxious grandmothers, Chinese have become disenchanted with the dollar...Many Chinese view the yuan, also called the renminbi, as the safer currency to hold.' If dollars and yuan traded freely, this change in attitude would lead to:

a) A stronger yuan and weaker dollar
b) A weaker yuan and stronger dollar
c) Stable exchange rates
d) A decrease in global currency trade

Answer 1

A change in attitude leading to preference for the yuan over the dollar would result in a stronger yuan and weaker dollar due to shifts in demand in the foreign exchange market, impacting international trade and global economic dynamics. Correct option is a)

Step-by-step explanation:

If dollars and yuan traded freely and Chinese individuals and businesses started favoring the yuan over the dollar, this shift in preference would lead to an increased demand for the yuan and a decreased demand for the dollar in the foreign exchange market. Considering the laws of supply and demand, a higher demand for yuan coupled with a decreased demand for the dollar would lead to a stronger yuan and a weaker dollar. Businesses that engage in international trade, particularly those where costs and revenues are denominated in different currencies, would need to adjust their strategies in response to these changes in exchange rates. A stronger yuan could make Chinese exports more expensive and reduce their competitiveness abroad, while a weaker dollar could make U.S. exports cheaper and more attractive to foreign buyers. Such movements in currency strengths can significantly affect the global economy and international trade dynamics.