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China Will Increase Spending to Revive Economic Growth

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China plans fiscal stimulus to boost its economy and fight falling prices by issuing 2 trillion yuan (about $284 billion) in bonds. Half of this money will be used to subsidize consumer items and provide financial support (transfer payments) for families with children. – cnn.com, October 11, 2024

Answer the following questions to check your understanding of the story.

How is the Chinese government planning to pay for its subsidies and transfer payments?

The Chinese government will pay for its subsidies and transfer payments by _____________.

Wrong! - Does a central bank buy bonds directly from the government and pay for them by printing money? Governments do finance their expenditures by raising taxes, is this the option the Chinese government is considering? Won’t lowering the taxes leave the government unable to pay for its subsidies and transfer payments?

That's Right! - China will pay for its subsidies and transfer payments by borrowing around $ 284 billion. When investors buy Chinese bonds, they are lending money to the government.

How does China's fiscal stimulus change the government budget balance, government debt, and real GDP?

China's fiscal stimulus would ___________ the budget balance, ___________ the government debt, and ___________ the real GDP.

Wrong! - Subsidies and transfer payments are government outlays. If subsidies and transfer payments increase, how do government outlays change? If the government borrowed money by selling bonds, how will government debt change? How does the change in consumption expenditure change government outlays?

Good Job! - A fiscal stimulus is used when real GDP is less than potential GDP. As subsidies and transfer payments increase, the budget balance which is defined as receipts minus outlays would decrease. Selling bonds would increase government debt. Providing financial support to people and subsidizing consumer items will increase consumption expenditure. Aggregate demand will increase and increase real GDP.

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