Question 4 {Maoroeeonomiem El] points}. The relationship between China and the United States is often in the news. To refresh your memory, here are four facts about the IChinese economy: I IEhina manages its exchange rate with the duller. o China runs a trade surplus with the United States. i The Chinese central bank owns a large number of US. Treasury hills. I Individual Chinese residents are not free to invest their savings in foreign coun tries as they would like. Any movement away from a managed exchange rate would probably include a relaxation of these restrictions. Now evaluate the following claims below with three to ve sentenoes for each. You should also feel free to use graphs or equations where appropriate. Your goal is to discuss whyr the claim is true. partially true, or not true at all. a. {5 points} \"Cheap imports from China come a steep oost lost jobs and lower wages for American workers.\" \fd. [5 points} \"The only way for the United States tn close its bilateral trade decit with China is tn either raise national savings in the US. er reduce investment in new plant and equipment in the 1.1.3." \ff. [5 points} \"If China stopped managing the value of its eurrenejr.| the 1value of the China's currency would strengthen relative tn the duller and US. interest rates 1:Ivanzzrulrl rise. lQuestion 5 (Macroeconomics, 30 points}. Assume that1 in the short run: there are two types of \"shocks\" which may cause the level of GDP to deviate from the long run1 full employment level: (1] changes in autonomous investment spending; and [2} changes in autonomous money demand. Explain how you reached your results for all the parts of this question (a. through d.]. You should feel free to use graphs or equations where appropriate. For all the parts of this question (a. through d.], analysis should he conducted for the short run only. a. [9 points} Suppose that the Fed sticks to money supply targeting: in response to any investment spending or money demand shocks, the Fed will leave the money supply at the predetermined and targeted level. How will this money supply targeting strategy affect the deviations of output from the full employment level under each of the two types of shocks?I h. [9 points} Now suppose that the Fed targets the interest rate: In response to any.r shocks, it adjusts the money suppl},r to maintain the interest rate at its initial targeted level. How will this interest rate targeting strategr affect the variations of output from the Full employment level under each of the two types of shocks?
