CHINA IS EXPERIENCING AN AGGREGATE INCREASE IN BORROWING AND A POSITIVE OUTPUT GAP, WHICH IMPLIES THAT THE ECONOMY IS PRODUCING BEYOND ITS SUSTAINABLE CAPACITY

2. A is correct. China is experiencing an aggregate increase in borrowing and a positive output

gap, which implies that the economy is producing beyond its sustainable capacity. Hence the

policy rate should be above the neutral rate. Conversely if the output gap is negative, the

policy rate should be below the neutral rate. Section 4.2. LO.d.