As the root cause of inflation remains unknown,
the Chinese government could follow the traditional
strategy to solve the inflation issue,
which uses the combination of both monetary policy and fiscal
policy.
Under the current economic,a fiscal
austerity might not be effective to control the inflation issue. A
fiscal contraction will directly decrease the Chinese aggregate demand and degrade the overall
equilibrium price and quantity
(Samuelson, 2010)
This situation is unfavour rable to the Chinese
economy and GDP growth. This is because a fiscal contraction could damage both malicious inflation
and benign inflation, in which the benign inflation is an input of economic growth