The AD/AS Model to Explain the Economy of China Essay...

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†¦show more content†¦Also, initially demand for pounds increases due to increase in exports, interest rates will rise as a result and exchange rates of pounds will appreciate. The demand of exports will decrease as it has become mor e expensive and AD will decrease until it reaches long run equilibrium. On the other hand, China’s rapid growth also leads to a large increase in demand of goods and services around the world and an overall increase in input prices. This results in a negative demand shock for the UK, and the aggregate demand curve shifts to the left. There will be a decrease AD and GDP also falls below long run equilibrium and decrease in price. When output is below the full employment level, wage rates fall and the SRAS curve will shift right as firms are encouraged to produce more. A new equilibrium is found at same long run GDP but with lower prices. The UK’s economy adjusts back with full employment level. Also, if technology is improving at the same time that would shift the LRAS curve to the right, lowering interest rates in UK’s economy. However, the lowering in interest rates will not necessarily cause a corresponding increase in AD as it is largely dependent on expectations. In China’s case, the expectations will be high due to the su stained boom in the past 10-15 years and the decrease in interest rates will result in a large increase in investments. However, low interest rates in China will have the opposite effect onShow MoreRelatedA Brief Note On The Global Price Of Petroleum Exporting Countries Essay1219 Words   |  5 Pages1. 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