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Determine what monetary policy is needed

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Reference no: EM133202818

Coal prices in China hit a record high, having risen more than 260% in the year to date. Despite recent attempts to bolster its supply, China faces a coal shortage and power shortages have been reported in 19 provinces" (the Economist, Oct. 19, 2021). Coal is used extensively for energy production in China. Please show all models/graphs, explain the shifts and effects on the variables for the following questions:

(a) Is this predominantly a negative Aggregate Demand (AD) shock or a negative Aggregate Supply (AS) shock for the Chinese economy? Use the IS/LM/FE model to predict the short-run and long- run effects of this shock on output, the interest rate, and prices.

(b) Suppose in response to this shock, the People's Bank of China (the country's central bank), decides to reduce interest rates. Use the money market to determine what monetary policy (expansion or contraction) is needed to achieve the decrease in interest rates.

(c) Use the AD/AS model to predict the effects of the combined shocks of (1.a) and (1.b) on Chinese GDP and the price level. Is the central bank acting as if it is targeting the price level or real GDP?

(d) Consider China's labor market. What are the effects of the shock in (1.a) on employment, unemployment, and the real wage? How would your answer change if you also consider China's recent demographic trends that will result in a shrinking of the labor force?

Reference no: EM133202818

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