MACROECON MAJORS HELp?

Question

Suppose China's central bank decides to increase its purchases of U.S. government bonds in order to stabilize the yuan (the Chinese currency). All else constant, show how this affects the United States' net capital inflow curve (KI).

should graph be shift right or left???

Answer 1

Capital inflow will increase thus capital inflow curve will shift right (but capital outflow will fall thus net capital outflow will shift left).

Net export will tend to fall (due to increase in imports), demand for US dollar will rise pressing to appreciate dollar and supply on international market of Yuan will increase depreciating it (except the case if China spends it's foreign currency reserves to buy US bonds). Interest rates in US will rise due to increase in demand for bonds (thus market price of bonds will increase too).

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