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).
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.
3. Draw a AD-AS diagram to illustrate your answer.

Answer 1

In response to US Tariffs, the Chinese economy faces high risk of recessionary economy as exports shrink and unemployment soars. And hence the Chinese government must adopt an expansionary fiscal policy while Chinese central bank must adopt an expansionary monetary policy by reducing interest rates which depreciates Yuan and makes exports competitive globally. An expansionary fiscal policy will induce higher government spending and tax cuts and boost disposable income and hence consumption rises and causes aggregate demand to rise in short run which creates higher real GDP growth, and Inflation and at same time reduces unemployment.