A) On March 23, 2020. U.S. Fed announces theinfinite quantitative easing policy, push the U.S. interest rate level to zero.Use the Foreign Exchange Rate Model to predict the short-run...

A) On March 23, 2020. U.S. Fed announces the infinite quantitative easing policy, push the U.S. interest rate level to zero. Use the Foreign Exchange Rate Model to predict the
short-run
appreciation/depreciation of RMB. Is it consistently with the parity rates listed in the above
Table 1? (7 marks)

B) What would be the
short run
implication if market believes that U.S. quantitative easing is a
long-run
policy? (6 marks)

C) In the second half year of 2020, the Chinese fully recovered from the Covid-19 crisis, and its reported that current account surpluses reaches its highest level in the recent years. Together with this fact, use the long run exchange rate determinant theory to explain the following USD/CNY parity rate dynamics in
Figure 1: (horizontal line is date and vertical line is the USD/CNY parity rate) (7 marks)

Figure 1: The dynamics of USD/CNY

D) Suppose the USD/CNY rate is determined rigorously following the “two pillar” exchange rate policy, use the information of parity rate and closing rate (one day before) to back out the implied dollar index, 1) fill in your answer in the
Table 2.

You only need to provide the numbers for 28 May 2021, 27 May 2021 and 26 Mar 2021. 2) explain the two pillar exchange rate policy (i.e., what is the purpose to specify the parity rate in this method, what is the meaning of each variable in the rule?)

(10 marks)

Here is the two pillar policy, with

Table 2: USD/CNY Exchange Rate in 2021