Hu Tells Leaders China Growth Will Help World Economy Chinese President Hu Jintao told world leaders that his country "has taken an active part in the international cooperation to deal with the financial crisis'' by providing a "$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."
Hu stated that "China is in itself an important contribution to international financial stability and world economic growth.''
www.bloomberg.com 11/15/2008
Which of the following will occur if China's spending generates economic growth in real GDP per person?
i. There will be an upward shift in China's aggregate production function.
ii. There will be a rightward shift in China's labor demand curve.
iII. There will be an increase in the real wage.

Question

Quizplus · Accepted Answer

If China's spending generates economic growth in real GDP per person, it implies an increase in productivity and economic output. This would lead to an upward shift in China's aggregate production function (i) as the economy becomes more productive. Additionally, with increased economic activity and output, there would be a higher demand for labor to support the growth, leading to a rightward shift in China's labor demand curve (ii). As a result of the increased demand for labor, the competition among employers to hire workers would increase, leading to an increase in the real wage (iii).