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In the year 2000, the Chinese economy’s growth was not as fast as the government expected....

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. a. Explain this decision, using the model of aggregate demand and aggregate supply. (6%) b. Why did the Chinese government not wait until the economy adjusted back to its expected long-run position of high economic growth? (2%)

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Answer #1

b.

Adjusting back is the process of self-correction. It requires time and during such span of time, the economy may suffer a lot (like recession, high unemployment, etc.).

The government may not want such situation; and therefore, took the early step.

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