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The Ad/As Model To Explain The Economy Of China

668 words - 3 pages

Using the AD/AS model, we can account for China’s economy to have stable prices by having corresponding growth in output and technology or in other words, corresponding shifts in AD curve and the LRAS curve. Since China has a floating exchange rate, the appropriate macroeconomic policy would be a monetary policy. Typical monetary policies use monetary factors like changing interest rates or money supply to change consumer spending. For example to influence spending governments would increase the money supply and that will cause interest rates to decrease, cause investment to increase and eventually increases AD. The AD curve shifts right and results in a temporary short run equilibrium at higher prices but also higher GDP. The increase in price and wages due to low productivity in labour forces prices up further and the SRAS curve shifts left, returning the economy back to the original long run equilibrium. Monetary policy is also more appropriate as fiscal policies have no effect in the long run, since equilibrium goes back to the original LRAS GDP but with higher prices if all else is constant.
As China becomes even more developed, they acquire better technology, and thus their costs of inputs will continue to decrease due to further increase in productivity of labour. The LRAS curve shifts right, leading to lower prices and higher output at the new equilibrium. If prices in China are lower than in the United Kingdom (UK) than there would be an increase in demand for goods and services in China. From UK’s point of view, it is cheaper to purchase from China than domestically, thus this will also increase in imports and decrease in exports of the UK. However, because of the increase in national income in China, there is an increase in demand for goods and services in foreign markets like the UK. This increase in foreign demand from China would result in an overall increase in the AD in the UK, the...

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