To maintain a fixed exchange rate with the US in the long run while preserving monetary autonomy, China would need to ensure that its price level moves in conjunction with the US price level, supporting purchasing power parity. The other options do not offer a sustainable means of achieving this balance.
- The question pertains to the macroeconomic policy trilemma, which posits that it's impossible for a country to simultaneously maintain all three of the following: a fixed exchange rate, free capital movement (absence of capital controls), and an independent monetary policy.
- When a country chooses a fixed nominal exchange rate against another currency, such as the US dollar, it gives up some control over its monetary policy unless capital mobility is restricted.
- To maintain a fixed exchange rate in the long run, without losing monetary autonomy, China would need to ensure that its price level moves in tandem with the U.S. price level.
- This would be consistent with maintaining purchasing power parity over time.
- Therefore, the correct answer is: (c) the price level in China would have to move in tandem with the U.S. price level.
- If the price levels move together, it reduces the need for adjustments in monetary policy or exchange rates to correct imbalances.
- While options (a), (b), (d), and (e) might influence financial or trade flows in the short run, they are not sustainable solutions for maintaining a fixed exchange rate with monetary autonomy in the long run.