Question

China and its economic growth

Economic growth, a phenomena, all the countries wants to go, never the less China a highly populated country. China expects its economy to grow around 8 percent in 2010 from a year earlier, Setting the 8-percent target, mainly "aims at ensuring the quality of economic growth, focusing on transformation of economic development pattern and adjustment of economic structure," says the report.

The increase of consumer price index, a main gauge of the country's inflation, will be held around 3 percent, it says.

Although the development environment this year may be better than 2009, China "will still face a complicated situation," reads the report.

The year of 2010 will be a "crucial but complicated" year for China's economic development as the country will continue fighting against the global financial crisis while maintaining a stable and comparatively fast economic growth and the accelerating transformation of growth pattern, according to the report.

As the first country emerging from the global economic downturn, China's gross domestic product (GDP) rose 8.7 percent in 2009 from a year earlier, above the 8-percent target the government set at the beginning of last year.

China's quarterly economic growth accelerated as the government's economic stimulus package started to pay off. The national economy rose 6.2 percent in the first quarter last year, 7.9 percent in the second quarter, 9.1 percent in the third and 10.7 percent in the fourth.

China to keep yuan 'basically stable'

China will keep the exchange rate of its currency yuan "basically stable" at an "appropriate and balanced" level, according to a government work report to be delivered by Premier Wen Jiabao at the parliament's annual session Friday.

The country will also continue to improve the mechanism for setting the yuan exchange rate, it says.

China to continue 'proactive fiscal policy, moderately easy monetary policy'

China will continue to implement a proactive fiscal policy and a moderately easy monetary policy in 2010, says a government work report to be delivered by Premier Wen Jiabao at the parliament's annual session Friday, Chinese growth vulnerable to changes in other economies mainly because of their reliance on exports.

"We need to maintain continuity and stability in our policies while constantly making them better-targeted and more flexible as circumstances and conditions change," reads the report, distributed to the media before the opening of the Third Session of the 11th National People's Congress (NPC).

The report says China will not only "maintain sufficient policy intensity and consolidate the momentum of the economic turnaround," but also need to accelerate economic restructuring and make substantive progress in transforming the pattern of economic development.

In addition, China also needs to manage inflation expectations well and keep the overall level of prices stable, the report says.

Q5. The case talks about keeping the monetary policy easy to help the economy. What do you understand by easy monetary policy? How easy monetary policy can help countries out of crisis and boost the economy?

Q5 : China is using flexible Fiscal policy to move out of economic downturn. If an economy is down, how it balance between AD and AS and its effects? What Fiscal measures need to use to boost to bring the balance in AD and AS.?

Important: - Each answer should have minimum 100 words, if data or table used to support your answer, must give proper reference

Answer 1

Q.5(1)                         An easy monetary policy, otherwise referred to as the expansionary monetary policy refers to a policy mechanism that is intended at increasing the money supply in the economy. In order to implement such a policy, the major policy measure taken by the central bank of the nation would be to reduce the interest rates in the economy. The following are the ways in which an easy money policy would result in bettering the economic growth of a nation

· Since the interest rates are lower, the banks would have more money to lend to the public in the form of loans which would result in a better economic growth.

· An easy money policy would result in lowering the value of money and hence would boost the demand in the economy and hence would improve the value of securities in short-term economy.

· The discount rates are reduced and Treasury notes are bought from the banks which would result in more money to be spent in the economy.

· By lowering the reserve requirements, more money would be made available to the banks for lending which would mean that the investment patterns in the economy would be improved which could propel the economy to grow further

Thus, the above factors of an easy money policy could help an economy to tide over the effects caused by a crisis and hence boost the economy of the nation.

Q.5(2)                         The AD-AS model represents the graphical representation of the Aggregate Demand and the Aggregate supply in an economy due to various fluctuations in an economy. The following are the effects on the Aggregate Demand and Aggregate Supply in an economy which is down which means that a recessionary or deflationary phase is going on in an economy

· During a recessionary phase, the Aggregate Supply curve is found to be horizontal as the economy would be able to generate the supply that is being demanded in the market. This is because of the present unemployment would make the labour availability better and production could be achieved at no additional costs

· In a contractionary phase, the demand would be lower and thus the production would also decline causing a decline in the supply patterns in the economy. Thus, in such a phase, the Aggregate Supply curve would shift inward. Thus, by introducing an expansionary monetary and fiscal policy, the money flow could be raised in the economy and the Aggregate supply levels could be improved which would cause the Supply curve to be shifted to the right.

· In a contractionary economy, the Aggregate Demand would be also lower which could result in the leftward shift in the Aggregate Demand curve. Thus, as suggested earlier, expansionary policies should be implemented and tax cuts should be done so as to improve the demand in the economy and hence would result in the rightward shift in the Aggregate Demand curve.