Hu Tells Leaders China Growth Will Help World Economy
Chinese President Hu Jintao told world leaders that his country ʺhas taken an active part in the international cooperation to deal with the financial crisisʹʹ by providing a ʺ$586 billion economic stimulus, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies.ʺ
Hu stated that ʺChina is in itself an important contribution to international financial stability and world economic growth.ʹ
Which of the following will occur if Chinaʹs spending generates economic growth in real GDP per person?
i. There will be an upward shift in Chinaʹs aggregate production function.
ii. There will be a rightward shift in Chinaʹs labor demand curve.
iii. There will be an increase in the real wage.

Question

Quizplus · Accepted Answer

When China's spending generates economic growth in real GDP per person, it implies an increase in productivity, which leads to an upward shift in China's aggregate production function (i). As firms expand production to meet the increasing demand, they will require more labor, which will lead to a rightward shift in China's labor demand curve (ii). As demand for labor increases, workers become scarce, and they can command higher wages, resulting in an increase in the real wage (iii). Therefore, all three options are correct.