China's Interest Rates

Chapter 8: China interest rates are normally substantial higher than U.S interest rate.

a. What does this imply about inflation differential (China inflation minus U.S inflation), assuming that the real interest rate is the same in both countries? Does this imply that the China Renminbi will appreciate or depreciate? Explain.

According to the Purchasing Power Parity (PPP) if the local interest rate is relatively higher than U.S interest rate, and the real interest rate was remain the same for both countries, then the inflation rate is considered will affect the exchange rate movements. As a result, inflation differential will imply on the depreciation of China Renminbi. For an ...

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demands for local goods; no demand local goods refer to the demands for China Renminbi.

b. It may be argued that the high China interest rates should entice U.S investors to invest in China money market securities, which could cause the China Renminbi to appreciate. Reconcile this theory with your answer in part (a). If you believe that the high China interest rates will not entice U.S investors, explain your reasoning.

First of all, the high China interest rate would not entice the U.S investors due to the inflation is relatively higher in China compared to U.S. Even, if the U.S investors still decide to invest in China by expecting to get a high return from the investment due to the high interest rate, they are still going to get a low return when they convert the investment return to U.S Dollar. This situation is happen caused by the higher inflation rate between China and U.S. The high inflation rate in certain country can caused the value of that currency to depreciate ...

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PAPER DETAILS
Added: 3/6/2011 01:25:08 PM
Submitted By: Chandirika
Category: Business
Type: Premium Paper
Words: 393
Pages: 2

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