The Chinese government managed the value of the Chinese yuan relative to the US. Between 1995 -2005 the yuan was pegged to the dollar at a rate of 8.28 yuan per US. China's central bank is responsible for using monetary policy to defend the fixed exchange rate. as a result of government policy geared toward spurring capital investment, China experienced a significance increase in investment demand.
Using the IS-I'm diagram for home (China ) and foreign (US) illustrate the impact of this policy assuming that China's central bank respond to maintain a fixed exchange rate. how would this policy and CB response affect the government budget, current account., domestic interest rates and output?
Following on the previous question how would China experience be different of the central bank allowed the yuan to float against the US. What would be the implications for china export to the US. For china import from the US?