Cny Appreciation

What happens if the Chinese money (CNY) appreciates against the Euro?

Assignment 1

a) From Figure 1 and 2 we can see that the CNY has appreciated against the Euro. From Figure 1 we see that in January 2006 the cost of 1CNY was about 9.5Euros and in May of 2008 the cost of 1CNY is now 11Euro. Therefore the CNY has become more expensive against the Euro.

Figure 2 explains the same thing, but here in terms of the Euro вЂ"We see clearly that the Euro has depreciated against the CNY and that 1Euro went from costing 0.106CNY and now it costs only 0.091CNY in 2008. This means that it has become more expensive to buy the CNY currency and the Euro has depreciated against it.

b) The main reason that the CNY has appreciated so much against the Euro is that the factors which the exchange rate is based on has developed better in China in the last 2 years than they have in Europe. These factors are for example Economic Growth. Production in China is very high and the wages and cost of resources are low, this means that demand for Chinese goods and the CNY has increased.

The high growth within China has lead to increased Aggregate Demand from Chinese which means that there is higher transactions demand for money. This has shifted the L curve of the CNY to the right and further caused the appreciation of the CNY.

I also believe that the speculation demand for the CNY has increased, it is well known that China is will become the next big country on the economic scene and this has lead to more people to buying the CNY with the expectation that it will increase in value. This has further shifted the L curve for CNY to the right.

c) I will illustrate how the increased demand for Chinese products from Europe has affected the exchange rate.

As Europeans demand toys from China, this has given an increase in the Demand for Money (L) curve of the CNY. The appreciation of the CNY can be explained by the Exchange Rate Transmission Mechanism in appendix 1 figure 1.1. You can see how this increase in AD has shifted the Demand curve for CNY to the right. This has brought the exchange rate between the CNY and the Euro from point A Q1-ER1 to point B Q2-ER2. The cost of the CNY is now higher in terms of the Euro and the CNY has appreciated.

Assignment 2

a) I will answer this question using these three models: 1) IS/LM 2) AD/AS 3) (X-M)

1) IS/LM вЂ" The IS/LM curve will show the effect of the appreciation of the CNY on the Production and Unemployment of China. See Appendix 1 Figure 2.1 for the model and definition. In the beginning we have point A of Y1-r1. Then an increase in demand for the CNY which will lead to an increase in r in China, this leads to a decrease in Investment. Hence there will be a left shift in the IS curve in China. This gives us a new equilibrium point at B Y2-r2. We see that there has been a decrease in Y from Y1 to Y2, which means a decrease in Production. A decrease in Production will lead to fewer available jobs and this will give a higher Unemployment rate.

2) AD/AS вЂ" from this model we will also see the effect on production and Unemployment and Inflation in China. See appendix 2 Figure 2.2 for model and definition. First we have equilibrium at point A P1-Y1. Then the CNY appreciates this leads to a fall in Exports, because it is more expensive for other countries to import from China. There is also a fall in Investment because of increased interest rate in China. This will shift the AD curve to the left. This gives us a new equilibrium at point B P2-Y2.

Production: A decrease from Y1 to Y2, this decrease in production means less GDP and more unemployment.

Inflation: The CPI changes from P1 to P2, this means that prices of goods in China has decreased and hence inflation has decreased (demand pull inflation)

3) (X-M) вЂ" The Balance of Payment (BP) model will illustrate the change in BP, production and unemployment in China because of the appreciation of CNY. See appendix 2 figure 2.3 for the model and definition. First we have BP that is in equilibrium there is no surplus or deficit at point A B1-Y1.The fast appreciation of the CNY leads to a decrease in Export for China and the (X-M) curve will shift to the left. This gives us point B B2-Y2.

Balance of Payment: The BP has decreased from point B1 to B2, it has become worse and there is now a deficit on the Balance of Payment. The deficit on the BP means that there is has been an increase in the PSNCR and that the Chinese Government now owes money.

Production: Production will also decrease because of less demand for Chinese goods вЂ" as they have gotten more expensive. This leads to more unemployment.

Inflation: the Chinese