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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 unfavorable 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
According to the Chinese National Bureau of Statistics
the comfort zone of inflation level is around 2% to 4%. When the inflation is below2%, the insufficiency of inflation momentum may cause an economy stagnant, such as Japan. When the inflation is above 4%,
the Chinese government will face the condemnation of people. Thus, although the issue of excess liquidity is severely influencing the inflation, the current inflation rate is 5.4% (slightly above 4%) implies an impracticality of demand control. This is because the traditional Chinese saving behavior offsets the strong inflation impact of excess liquidity.
Besides, the huge polarization of rich and poor causes a disaccord in purchasing power increment between the rural area and urban area
Therefore, the impracticality of fiscal contraction is embodied from the high probability of destroying both benign inflation and malicious inflation
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