Read the attachment below please first.
Explain, using the aggregate demand and aggregate supply (AD/AS) framework and with the help of a graph, how a trade war with the US will impact on China's GDP. Using the AD/AS graph, now explain how the middle class can come to the rescue of China's economy. Using economic terms, what are the reasons why the middle class may not increase spending as hoped by the Chinese government?
Read the following excerptfrom the article entitled 'China wants its middle class to spend big but they have bills to pay' (Wang 2018) and answer the followingquestion. China's middle class is something ofa mythical entity. with wide-ranging estimates of its size and economic power. Optimists believe a large and growing middle class has the ability to lift China and even the world to a more prosperous level. while pessimists foresee an increasingly burdened group that could cause the economy to stagnate and even lead to political chaos. Beijing wants the middle class to come to the rescue of China's economy. But rising costs. mounting household debt. worries about their future income as the economy slows and doubts over whether the government can adeauateiy provide for the ageing population have made consumers cautious. in many cases. they are doing the opposite ofwhat the government wants and pulling back from spending. Whether this so-called consumption downgrade is broad-based and a threat to Beijing's economic plans 7 or not is a matter of intense debate in Chinese policymakingcircles. But it is clear that many in China's middle class are struggling to make ends meet. China is now betting that its middle classithe largest in the we rid with more than 400 million consumers. according to the authorities estimateiwill increase their discretionary spending on products and services and help stabilise the economy amid the trade war with the United States. The National Developmentand Reform Commission. the government's powerful planning agency. last month announced that it had organised a spec iai forum to study increasing salaries for loweremiddle, middle- and upper-middle incomegroups. whose average annual individual disposable earnings range from 13.843 yuan to 34,547 yuan. Ma ng 2018) Question 5. Explain, using the aggregate demand and aggregate supply (AD/AS) framework and with the aid of a graph, how a trade war with the US will impact on China's GDP. Using the ADfAS graph, now explain how the middle class can come to the rescue of China's economy. Using economic terms, what are the reasons why the middle class may not increase spending as hoped by the Chinese government? [Hint: trade warwill increase prices of Chinese goods in the US.] (4 marks} Maximum number of words: 350
