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Effect of china fiscal policy on national saving rate

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Reference no: EM132422505

China has seen a steep rise in total debt from 150% of GDP in 2008 to 250% today (the Economist, Nov. 15, 2018). Suppose the Chinese government addresses this with a package of spending cuts.

(al) Assume first this will affect only government consumption and will have neither wealth nor productivity effects. Use the AD/AS model to predict the short-run and long-run effects on output, employment, (real and nominal) wages, and prices. (a2) In actuality, the fiscal plans are expected to reduce spending on infrastructure. Taking into account productivity effects, how does your answer in (al) change, if at all?

(b) China is in fact an open economy. Consider the open-economy IS/LM/FE model and assume the yuan is floating. What will be the effects of the fiscal policy assumed in (al) above on output and interest rates, the yuan/S exchange rate, and foreign (US) output and interest rates?

(c1) What is the effect of China's fiscal policy on the national saving rate? Use the Solow growth model to predict the effects on China's steady-state income per capita (c2) How does your answer change if the fiscal policy reduces government activities that have productivity efrects?

Reference no: EM132422505

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