The very strong growth in China over the past 10 to 15 years has been due to (a) very high
levels of investment in China (from both domestic and foreign sources); and (b) a very rapid
transfer of foreign technology into the Chinese economy. This has led China to develop very
Using the Aggregate Demand / Aggregate Supply (AD/AS) macroeconomic model,
attempt all of the following:
(i) Explain how the Chinese economy has been able to grow very quickly without leading
to very large increases in prices. (Hint think of what the introduction to this
question implies for the long-run and short-run aggregate supply curves.) Given the
source of the rapid Chinese development, explain what the appropriate
macroeconomic policy response from the Chinese government should be so as to
maintain stable prices.
(ii) The rapid growth of the Chinese economy means that that the price of inputs
including oil, iron ore, and coal will increase around the world. Explain how this will
affect the United Kingdom economy.
(iii) As the Chinese economy develops it will also compete more effectively with United
Kingdom exports in world markets. Explain how this will affect the United Kingdom
(iv) Explain the appropriate United Kingdom macroeconomic policy response to the two
economic scenarios set out in parts (ii) and (iii) of this question.