Q8. Suppose the Chinese government decided to increase China's current account target to facilitate economic...
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Q8. Suppose the Chinese government decided to increase China's current account target to facilitate economic recovery from the coronavirus pandemic.
a. Assume China was initially in a long run equilibrium with a floating exchange rate regime prior to retargeting its current account level. Use the AA-DD-XX diagram to show and explain whether the initial equilibrium is above or below the new current account target. (1 point)
b. Explain how the Chinese government can achieve the new current account target through a permanent change in monetary policy using the AA-DD-XX diagram to show what happens to output, the spot exchange rate, and the real exchange rate. What are the short and long run effects? Will China be able to maintain the new current account target in both the long and short run? (7 points)
c. Explain how the Chinese government can achieve the new current account target through a permanent change in fiscal policy using the AA-DD-XX diagram to show what happens to output, the spot exchange rate, and the real exchange rate. What are the short and long run effects? Will China be able to maintain the new current account target in both the long and short run? (7 points)
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