Question 7 In the year 2000, the Chinese economy's growth was not as fast as the government expected. The Chinese government prolonged the Labour Day vacation (in May) to 7 days so that people could spend more.

a. Explain this decision, using the model of aggregate demand and aggregate supply. (6%)

b. Why did the Chinese government not wait until the economy adjusted back to its expected long-run position of high economic growth? (2%)

Question 8 Suppose the natural rate of unemployment is 6%. On one graph, draw two Phillips curves that can be used to describe the four situations listed below. Label the point that shows the position of the economy in each case: a. Actual inflation is 5% and expected inflation is 3%. (1%)

b. Actual inflation is 3% and expected inflation is 5%. (1%)

c. Actual inflation is 5% and expected inflation is 5%. (1%)

d. Actual inflation is 3% and expected inflation is 3%. (1%)