China is one of the few countries in the world to have a fixed exchange rate. In the past, it has experienced a huge increas in exports of goods. Use a "FOREX" diagram to show the effect of the increase in exports. In your answer you must explain the effect of the export surge on the money supply, the holdings of the Chinese Central Bank of gold and foreign exchange, the Current Account and Capital Account balances, and on China's overall Balance of Payments. For convenience you can assume that the Current Account is in deficit and the Capital Account is in surplus.

Graphics are a bit tough on the Jiskha site.

Google: Foreign Exchange Diagram
The first hit for: (uwb dot edu) should provide an answer for most of your questions.

I know the export increase will results in the large demand for Chinese currency, therefore in the demand-supply graph,the demand curve for chinese currency will shift rightwards, this should reduce the exchange rate, however the government use fixed exchange rate policy, so it requires the government to buy foreign currency or gold to satisfy this excess demand.

Overall the money supply of Chinese currency will increase, the GFE(CB) will increase.

But how about the rest? the Current account and Capital Account balances? Why the question mention the 2 assumptions?

I know the export increase will results in the large demand for Chinese currency, therefore in the demand-supply graph,the demand curve for chinese currency will shift rightwards, this should reduce the exchange rate, however the government use fixed exchange rate policy, so it requires the government to buy foreign currency or gold to satisfy this excess demand.

Overall the money supply of Chinese currency will increase, the GFE(CB) will increase.

But how about the rest? the Current account and Capital Account balances? Why the question mention the 2 assumptions?

The increase in exports will have a significant impact on various aspects of China's balance of payments. Let's break it down step by step:

1. Effect on the money supply: As you correctly mentioned, the surge in exports will lead to a large demand for Chinese currency. According to the demand and supply graph, this increased demand will shift the demand curve for Chinese currency to the right, which should reduce the exchange rate. However, since China maintains a fixed exchange rate policy, the government will need to intervene to maintain the exchange rate. To prevent the excessive appreciation of the currency, the Chinese central bank will purchase foreign currency or gold, increasing the money supply of Chinese currency.

2. Effect on the holdings of the Chinese Central Bank (GFECB): As a result of the increased demand for Chinese currency, the Chinese central bank will accumulate more foreign currency or gold reserves. This means that the holdings of the Chinese central bank of gold and foreign exchange will increase.

3. Effect on the Current Account balance: The Current Account balance represents the net flow of goods, services, and income between a country and the rest of the world. Since China is experiencing a surge in exports, it means that the exports of goods are increasing, resulting in a surplus in the Current Account. This surplus indicates that the value of exports exceeds the value of imports, and it contributes positively to China's overall balance of payments.

4. Effect on the Capital Account balance: The Capital Account balance reflects the net flow of capital between a country and the rest of the world. The assumption provided in the question states that the Capital Account is in surplus, which means that the inflow of capital into China exceeds the outflow. This can happen due to factors such as foreign investments, loans, or remittances from overseas. The specific reasons for the Capital Account surplus in this scenario are not mentioned, so it can be assumed that there are other factors contributing to the surplus apart from the export increase.

5. Effect on China's overall Balance of Payments: The overall Balance of Payments is the sum of the Current Account and Capital Account balances. In this case, with an increase in exports leading to a surplus in the Current Account and an assumed surplus in the Capital Account, China's overall Balance of Payments will have a surplus.

In summary, the increase in exports will result in a larger demand for Chinese currency, leading to an increase in the money supply. The Chinese central bank will accumulate more foreign currency or gold reserves, and the current account balance will improve as exports exceed imports. The capital account is assumed to be in surplus, but the specific reasons for this are not mentioned. Consequently, these factors contribute to a surplus in China's overall balance of payments.