Question

Question 7 (8%) In the year 2000, the Chinese economy's growth was not as fast as the government expected. The Chinese government prolonged the Labour Day vacation (in May) to 7 days so that people could spend more. b. Why did the Chinese government not wait until the economy adjusted back to its expected long-run position of high economic growth? (2%)

Answer 1

Answer: (a.) In the year 2000 , the Chinese's econonic growth was not as fast as the government expected. The Chinese government prolonged the Labour day vacation (in may) to 7 days so that people could spend more. Now, Growth in an economy depends upon the GDP of the country. GDP depends upon the Aggregate Demand CAD and Al depends upon the Consumption Spending (C). Thus, to increase the GDP of a country there must be an increase in the Consumption spending in that country. For this purpose only the Chinese Government took this step. The required graph model of Aggregate Demand (AD) and Aggregate Supply (AS) is as under: AS Price Level AD2 do & A Real GDP Suantity The initial equilibrium is at point to where AD and AS avore intersects. Then Ao increases to AD, and shifts sightwards due to an increase in consumption spending (C), how the equilibrium point becomes E. Now, if the Aggregate Demand (A) increases further, then the new Equilibrium will be E too. These changes

increases the growth (real GDP) from Go to o to Oz, although price level increases subsequently, (6.) The Chinese government did not wait until the economy adjusted back to its expected long-run position of high economic growth because it took a long time before the cconomy can go back to its initial equilibrium level & to accelerate growth process in the economy the Government took tris measure, as an early step. Also when the wages and prices are sticky in the economy the self-adjustment mechanism doesn't work well & as a result the economy can semain at recession or high unemployment level