If China wished to reduce their accumulation of foreign exchange reserves they could: A. allow their currency, the yuan, to float freely in the market place. B. reduce their current account surplus by importing more goods than they export. C. undertake both of the activities identified in choices A and B. D. try their best to reduce the trade imbalances with the rest of the world.
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Answered on
The correct answer is C. Undertaking both activities identified in choices A and B would potentially allow China to reduce their accumulation of foreign exchange reserves.
Explanation:
- Allowing their currency, the yuan, to float freely in the market would mean that its value would be determined by market forces (supply and demand) rather than being strictly controlled by the government. This might influence the level of foreign exchange reserves held.
- Reducing the current account surplus by importing more goods than they export could also help decrease the inflow of foreign currency and hence the accumulation of reserves.
By implementing both measures (allowing the currency to float and reducing the trade surplus), China could potentially reduce the accumulation of foreign exchange reserves.