Suggested Answers of BT2 Revision Package - ASKnLearn

The higher spending, translating into higher G in AD, can lead to higheroutput and national income. (Illustrate using AD-AS diagram and brieflyexplain how inventories, production, output, employment and nationalincome would be affected via the multiplier effect.) This will result inhigher actual growth as the increased spending is of significant amount(Extract 5 states that this sum represents about 16 percent of China’seconomic output in 2007 and is roughly equal to the total of all centraland local government spending in 2006.)General Price levelASAD 0 AD 1P 1P 0Real national incomeY 0 Y 1The spending can also promote sustained growth as it is mainly oninfrastructure investment (Table 3 lists the proposed spending oninvestment projects such as transportation network, power grids,technological innovation and education.) that can increase theproductive capacity of the country. LRAS will increase and together withan increase in AD, result in sustained growth.Anti-thesis: The stimulus plan is ineffective in sustaining EG and LSIn the short run, the spending is mainly focusing on infrastructureconstruction and relatively little is spent on improving living standardsas stated in the last paragraph of Extract 5. Hence it will not be effectivein raising living standards as China is large and populous and moreneeds to be spent.In the long run, sound infrastructure will definitely contribute to China’spotential growth, and is also necessary to improve people’s livingstandards. However in the short run, in the case of China, infrastructureconstruction would only play a limited role in boosting domesticconsumption and hence has limited effect on material well-being of thepeople. While large scale infrastructure construction could generate