Question: Now that we've built up some intuition about exchange rates, let's apply the principles more thoroughly. In this question, we discuss the U.S.-China exchange rate. Officially, the Chinese government fixed this exchange rate for years at a time, but in this question, we treat it as a market rate that can change every day.
a. In the following figure, shift the appropriate curves to illustrate the effect of the following news story: Chinese factory sells poisonous dog food.
b. Does this news story raise or lower the price of the yuan? Does this strengthen or weaken the Chinese currency? Does this strengthen or weaken the U.S. dollar?