Question

1. What actions have, or can the Chinese government and China’s central bank take in response to the US trade tariffs? In your answer identify two actions (one for the Government and one for the Central Bank).

The Chinese government has set tariffs on US goods and the Central Bank has devalued its currency.

2. Explain these actions and their intended impact on China’s RGDP, unemployment and the price level. For AS factors indicate whether they are long-run or short-run AS factors or both.

2. Draw a AD-AS diagram to illustrate your answer.

Answer 1

1) According to many economists following are the effects of the trade war taking place.

2019 Chinese gross domestic product is 6 per cent and for 2020 it is 5.7 per cent. The figure as per shown is some what  0.6 percentage point lower for 2019 and 0.8 percentage point lower for 2020 because of expected impact of the trade war if it is not resolved. Chief economists have said that the job market has been worst hit by the trade war. The job vacancy to application ratio dropped to 1.68 in the first quarter from 1.91 a year ago, dropping for the sixth straight quarter, indicating that there are more applicants seeking a limited number of vacancies.

In the month of October, 2018, fiscal revenues fell 3.1 per cent from the same month last year, limiting the government’s scope for increased spending. Hence lesser consumer demand in the economy. Elsewhere, growth in Chinese retail sales slowed to 8.6 per cent which was the weakest in the year 2018. While the AS factor are actually long run, because if the trade war does not end, not only will the investments suffer but also the devalued currency might not be in demand in the global market.

2) Due to the investment being reduced the manufacturing will be affected and this would lead to the economy having lesser supply in the economy. This would increase the price levels and lower the economy and it's growth.