Fixed or pegged exchange rates are exchange rates that are held constant or allowed to vary within a very narrow margin (Madura 2008, p.154). The Chinese government re-pegged the yuan during the global financial crisis in July 2008, after unpegging it in July 2005. The current USD/CNY and EUR/CNY rates of 6.52 and 9.46, respectively, have been criticized as being too low, notably by the Chinese authorities. In the United States, in setting exchange rates, the central bank exchanges domestic and foreign exchange reserves to adjust the money supply so that the domestic interest rate equals the foreign interest rate. Since Chinese foreign exchange reserves are primarily made up of only US government and institutional bonds, most of our analysis will focus more on the impact of the US economy. The central bank would have the choice of using monetary policy or fiscal policy to change the money supply. In both policies, when the national currency (assume the dollar) appreciates above its fixed level, the central bank will enter the foreign exchange market. and buy foreign assets. This causes an increase in the domestic money supply, causing the short-term dollar interest rate to fall. A fall in the domestic exchange rate makes the return on dollar deposits lower than that on foreign currency deposits. In turn, investors will exchange their dollars for foreign currencies, thereby depreciating the dollar to its fixed level. The opposite occurs when the dollar depreciates less than desired. Policymakers in the United States and around the world have argued that the yuan is heavily undervalued by around 40% (Morrison and Labonte 2008, p.2). This statement is further supported by China's foreign exchange reserves exceeding $3 trillion, indicating government intervention to maintain...... middle of paper ...... Currency: Summary of World Economic Issues Federation of American Scientists -record China Reserves Pass $3 Trillion in Policy Challenge for G-20', Bloomberg News, April 14, 2011, Internet. Lau, Lawrence J., Trade, Working Paper No. 2, The Institute of Economics, Chinese University of Hong Kong. US-China business Council, United States -China Trade Statistics and China World Trade Statistics 2011, Annual Report 2001-2010, Beijing. Letter from Midas 2010, Chinese reserves threatened by devaluation thanks to the American dollar, Bowen Island. Morrison, W 2011, US-China Trade Issues, Joseph Congressional Research Service. , G 2008, Volatile Chinese stock market, Dresdener Bank