Lecture 5 (MCQ and SAQ)

Question 1

Falling growth rate is due to what type of growth

Answer 1

Potential (permanent) growth, not cyclical

Question 2

If the cause of slowing is potential growth then what type of policies needed?

Answer 2

Supply-side

Question 3

Types of supply side policies

Answer 3

Increasing participation

Improving responsiveness in input markets - labour, capital, demand

Question 4

If the cause of slowing is cyclical growth, then what type of policies needed?

Answer 4

Demand-side needed to boost aggregate demand

Question 5

Types of demand-side policies

Answer 5

Increasing fiscal expenditure

Increasing private consumption

Question 6

Applying stimulus measures in supply-side slowing causes

Answer 6

Inflationary pressures on consumer and asset prices

Question 7

Applying supply-side measures in the case of a cyclical slow down will lead to…

Answer 7

Deflation, worsening downturn

Question 8

What is a simple production function?

Answer 8

Y=f (TFP, K, H, L)

Question 9

In Y=f (TFP, K, H, L) what is TFP, and what happens to it when the economy reaches the technological frontier?

Answer 9

Total Factor Productivity, growth slows

Question 10

In Y=f (TFP, K, H, L) what is L, and what happens to it when the economy reaches the technological frontier?

Answer 10

As the economy becomes older, population growth slows (L)

Question 11

In Y=f (TFP, K, H, L) what is K and H, and what happens to it when the economy reaches the technological frontier?

Answer 11

K: physical capital
H: human capital

Slows due to diminishing marginal returns

Question 12

Opposing views on China’s slowdown (3)

Answer 12

1. Due to slowing growth in demand for exports, arising from GFC
2. Population ageing
3. Exhaustion of the capacity to draw upon a large pool of under-utilised labour

Question 13

What is Situation 1?

Answer 13

Strong actual and potential output growth

Question 14

What is Situation 2?

Answer 14

Weak actual output growth, strong potential growth

Question 15

What is situation 3?

Answer 15

Weak actual and potential output growth

Question 16

What is situation 4?

Answer 16

Strong actual output growth, weak potential output growth

Question 17

When was China in situation 1?

Answer 17

Up until 2010

Question 18

Factors of situation 1? Labour, H, K etc.

Answer 18

Labour relatively abundant
H and K growing rapidly such that diminishing returns to these factors have not yet set in
Favourable demographics- falling dependency ratio
Potential output above 10% actual tracked potential

Question 19

Biggest contribution to growth 1982-2010, situation 1?

Answer 19

Capital: 73%
Labour: 7%
Human Captial: 4%

Remainder: TFP 15%

Question 20

Situation 2 is consistent with a…

Answer 20

cyclical downturn - cyclical unemployment would tend to rise

Question 21

Chinese periods classed as Situation 2?

Answer 21

AFC (1997-2000)

GFC (2008-2009)

Question 22

When has China been in situation 3?

Answer 22

Since 2012

Question 23

When has China been in situation 4?

Answer 23

Aside from 3 periods of “overshooting” - early 1980s, early 1990s and before GFC
Situation has not arisen in China’s economic growth

Question 24

How would situation 4 occur?

Answer 24

Potential growth was not sufficiently high and economic stimulus measures were implemented - instead of growth could cause inflationary pressures

Question 25

Why is economic stimulus unlikely to create strong inflationary pressure?

Answer 25

• there has be deflation in producer prices
• low consumer price inflation
• low growth in aggregate demand

Would trigger supply-side expansion, releasing bottlenecks and embracing potential growth

Question 26

As China becomes richer its growth expected to converge to what rate of advanced economies?

Answer 26

4%

Question 27

Ways to increase TFP? (1)(3)

generates better outcome than converging to advanced economy growth rate

Answer 27

• increased innovation, arising from:
• • greater private sector activity (less SOEs)
• • stronger competition
• • less red tape

Question 28

Growth is driven by… (3)

Answer 28

Consumption (stable, albeit declining baseline) 
Investment (volatile, declining)
Net Exports (dwindled since 2009)

Question 29

China’s debt has grown substantially as a consequence of…

Answer 29

Economic stimulus during and after the GFC

Question 30

Most of China’s debt is held by..

Answer 30

Corporations, including SOEs as well as the private sector

Question 31

Of ‘real estate and construction’ and ‘industrial/manufacturing’ which has increased leverage and which has decreased leverage since the GFC?

Answer 31

REC: increased
IM: deleveraged

Question 32

China’s corporate sector has successfully managed to deleverage.. Over which 5 year period?

Answer 32

2003-08

Question 33

Two key drivers of corporate borrowing in China

Answer 33

Internally-funded corporate capital expenditure (reinvested earnings)
Real estate and construction borrowing

Question 34

Deleveraging is easier/harder than in 2003-08 because growth is faster/slower, and debt is at a historical high/low

Answer 34

Harder, slower, high

Question 35

China has less/more government and household debt that other countries but less/more corporate debt

(Overall debt in China is similar to other countries/regions)

Answer 35

Less, more