Concordia Liquidity Traps Implications for Monetary And Fiscal Policy Discussion

Part 1

You are an economic advisor to the government of China in 2008. The country has a current account surplus and is facing gathering inflationary pressures. The current account surplus is large, in excess of 9% of GDP. Additionally, China currently provides a rather low level of government services to its people. China’s government would like to attract workers from the rural countryside into manufacturing employment and would prefer to soften any negative impact of their policy package on urban employment.

Using this information, how would you advise the authorities to move the Yuan Reniminbi exchange rate? What would be your advice on fiscal policy?

Part 2

Assume that you are an economic advisor and your focus is on understanding the different types of exchange rate systems. You have been hired to understand the shifts in monetary policy and their influence on monetary policy. The only causes of fluctuations in stock prices are unexpected shifts in monetary policies. Now, your task is to explain whether a fixed or floating exchange rate system would cause greater gains from international asset trade. In your answer, focus on the change in policy with regard to monetary policy and its influence on exchange rates.