What happens if the Chinese money (CNY) appreciates against the Euro?
Assignment 1
a) From Figure 1 and 2 we can see that the CNY has appreciated against the Euro. From Figure 1 we see that in January 2006 the cost of 1CNY was about 9.5Euros and in May of 2008 the cost of 1CNY is now 11Euro. Therefore the CNY has become more expensive against the Euro.
Figure 2 explains the same thing, but here in terms of the Euro ? We see clearly that the Euro has depreciated against the CNY and that 1Euro went from costing 0.106CNY and now it costs only 0.091CNY in 2008. This means that it has become more expensive to buy the CNY currency and the Euro has depreciated against it.
b) The main reason that the CNY has appreciated so much against the Euro is that the factors which the exchange rate is based on has developed better in China in the last 2 years than they have in Europe. These factors are for example Economic Growth. Production in China is very high and the wages and cost of resources are low, this means that demand for Chinese goods and the CNY has increased.
The high growth within China has lead to increased Aggregate Demand from Chinese which means that there is higher transactions demand for money. This has shifted the L curve of the CNY to the right and further caused the appreciation of the CNY.
I also believe that the speculation demand for the CNY has increased, it is well known that China is will become the next big country on the economic scene and this has lead to more people to buying the CNY with the expectation that it will increase in value. This has further shifted the L curve for CNY to the right.
c) I will illustrate how the increased demand for Chinese products from Europe has affected the exchange rate.
As Europeans ...