Question

10. China’s economy has seen dramatic increases in investment, consumer spending, government expenditure on infrastructure, and exports to the United States and to Europe. Inflation in China, however, has remained fairly moderate. Explain why this may be the case using the aggregate demand curve and the inflation adjustment line.

Answer 1

In the context of the China, the consumer spending, export and overall aggregate demand is increasing, but real GDP has not yet achieved the potential GDP level in view of the large workforce in the Chinese economy. Further, the inflation rate increases when labor force demand higher wages and cost of factor of the production, increases. Bot, it is not the case in china due to large number of work force who is willing to work at lower wages. It causes the economy of scale by the Chinese economy that further reduces the price of the product. So, inflation rate remains at moderate or lower level, when increase in income of the Chinese people drive the aggregate demand.