ABSTRACT
This chapter examines the special case of China using the investment-savings/liquidity-money demand (IS/LM) framework and aggregate demand and supply framework. This is a very useful heuristic device for understanding the constraints and opportunities of an emerging economy. While a variety of macro models are now part of the economist's toolkit for analysis, the Keynesian model remains the workhorse for analyzing short-term economic fluctuations in output and employment. The LM curve describes equilibrium in the money market, but just as easily extends to equilibrium in all financial markets, whether they are equities, bonds, or currencies. The absence of explicit roles for prices, and the supply of goods are clear shortcomings of the traditional IS/LM framework. Ricardian equivalence is a budget constraint applied to a government's ability to borrow, spend, and tax over time. Flexibility and adaptability are two key assets of the Chinese citizen, as worker, saver, and consumer.
