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4) China's economy has been experiencing an investment and export boom that has pulled the unemployment rate well below the NAIRU. The country also has a substantial current account surplus, a significant capital account surplus, a fixed exchange rate, and relative capital immobility. The Peoples Bank of China (PBOC), China's central bank, always sterilises any foreign exchange market intervention that it undertakes. The Chinese government is worried about over investment in many industries and rising inflation. One alternative for dealing with these concerns is to have the PBOC use monetary policy to stabilise the economy at potential output. a) Based only on this information, use the IS-LM-BP model diagram to clearly show China's initial macroeconomic situation and what happens to equilibrium income, interest rates, and balance of payments if the PBOC uses monetary policy to stabilise the economy at potential output. Label your diagram clearly. b) Provide an economic explanation for what happens to China's equilibrium income, interest rates, investment, net exports, and the balance of payments as a result of the PBOC's monetary policy initiative to stabilise the economy at potential output. (8+10) * * * * * * * * * * * * * * * * * * * * * * * * 3 Scanned by CamScanner